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Colgate: The smile widens!

Jul 17, 2004

Introduction to results
Oral care major, Colgate Palmolive, reported its 1QFY05 numbers yesterday. The company has reported a much improved 6.8% growth in topline during the June quarter led by double digit volume growth. Continued operating margin improvement led the company to report a strong 23% bottomline growth. The company has beaten expectations of the market by reporting such strength in topline.

(Rs m) 1QFY04 1QFY05 Change FY04 YoY change
Net Sales 2,271 2,427 6.8% 9,392 -0.9%
Other Income 79 56 -29.6% 299 -16.3%
Expenditure 1,972 2,023 2.6% 7,928 -3.0%
Operating Profit (EBDIT) 299 403 34.8% 1,464 12.3%
Operating Profit Margin (%) 13.2% 16.6%   15.6%  
Interest 1 3 350.0% 6 145.8%
Depreciation 42 46 8.0% 243 24.6%
Profit before Tax 335 411 22.5% 1,515 3.4%
Tax 128 156 21.8% 435 -24.8%
Profit after Tax 207 254 23.0% 1,080 21.8%
Net profit margin (%) 9.1% 10.5%   11.5%  
Effective tax rate (%) 38.3% 38.0%   28.7%  
No. of Shares (m) 136.0 136.0   136.0  
Diluted earnings per share* (x) 6.1 7.5   7.9  
P/E ratio (x)   18.3   17.2  
(* annualised)          

Indian oral care giant
The Colgate name is synonymous with oral care in India. The company has successfully created a strong brand image and awareness in the minds of consumers over the last fifty years. Colgate India earns around 95% of its revenues from the oral care segment. The company is the leader in the 90,000 TPA oral care market with nearly 50% share. The oral care market has a penetration of only around 42% in India. The company also has a small presence in the personal products category with brands such as Palmolive (soaps, shaving products) and Charmis (face cream).

Topline growth drives performance in 1QFY05
Sales: The company undertook around 15%-17% price reduction in its overall toothpaste portfolio during most of FY04. The encouraging thing to note was that despite the sharp price cuts, value decline in sales was not that significant in FY04. In 1QFY05, the company witnessed double digit volume growth. Strong volume growth was evident in its flagship brand 'Colgate Dental Cream' (CDC) and Colgate Cibaca. This was the key reason for the growth in topline during the June quarter.

Operating margins: In FY04, one of the key reasons for the improvement in operating margins was the cost cutting on the advertising front. Ad expenses as a percentage of sales declined from nearly 20% in FY03 to about 16% in FY04. However, operating margins improved for a different reason this quarter. In 1QFY05, sales grew at a faster clip than expenditure. Cost of goods as well as employee costs were kept under control, thus aiding operating margin expansion. Advertising expenses, meanwhile, saw a marginal increase to 16% of sales during the quarter.

Cost break-up
as a % of net sales 4QFY03 4QFY04 FY04
Total Cost of goods 53.6% 51.0% 51.2%
Staff Cost 7.6% 6.2% 7.4%
Advertising 15.4% 16.0% 15.7%
Other Expenditure 10.2% 10.1% 10.1%

Net profit: Colgate's 23% net profit growth was led by the significant improvement of 340 basis points on the operating margin front. The improvement in OPM was enough to counter a 30% fall in other income and marginally higher interest and depreciation expenses.

Over the last four quarters
2QFY04 3QFY04 4QFY04 1QFY05
Sales growth (YoY) -3.2% 3.4% -0.6% 6.8%
Advertising as % of sales 15.3% 16.2% 12.2% 16.0%
OPM (%) 13.2% 12.9% 20.2% 16.6%
Net profit growth (YoY) 22.0% 30.1% 23.2% 23.0%

What to expect?
Colgate has declared an interim dividend of Rs 1.5 per share for FY05. At the current price of Rs 137, the stock trades at 18x annualised 1QFY05 earnings and market cap. to sales of 1.9x. Owing to the renewed strength in the topline the stock may see some more upside. However, the prospects of the company are still too leveraged on one product, which is facing intense competition in the market. It is early days yet to comment on whether this topline growth trend will sustain. Operating margin expansion too may be limited from here on.

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