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Colgate: Continues to dominate - Views on News from Equitymaster

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Colgate: Continues to dominate

Jul 17, 2008

Performance summary
  • Topline grows by 16% YoY in 1QFY09 led by 11.5% YoY volume growth.

  • Operating margins decline by 1.3% on account of higher ad and labour costs.

  • Bottomline jumps 16% YoY (excluding the extraordinary item) for the quarter.

  • In April 2008, it acquires a 75% stake in C. C. Healthcare, which has been manufacturing and supplying toothpowder to the company for several years, for a purchase consideration of Rs 19 m.



(Rs m) 1QFY08 1QFY09 % change
Net sales 3,507 4,076 16.2%
Expenditure 2,892 3,416 18.1%
Operating profit (EBDITA) 614 660 7.5%
EBDITA margin (%) 17.5% 16.2%  
Other income 210 312 48.6%
Interest 3 4 27.3%
Depreciation 44 55 24.9%
Profit before tax 777 913 17.5%
Extraordinary item 10 -  
Tax 158 194 22.9%
Profit after tax/(loss) 609 719 18.0%
Net profit margin (%) 17.4% 17.6%  
No. of shares (m) 136.0 136.0  
Diluted earnings per share (Rs)*   17.8  
Price to earnings ratio (x)*   19.8  
* Trailing 12-month earnings

What has driven performance in 1QFY09?
  • Colgate reported a topline growth of 16% YoY in 1QFY09 led by a 10.9% YoY growth in the toothpaste category and a robust 32% YoY growth in volumes in the toothbrush category. The company achieved an overall volume growth of 11.5% YoY. The company has recently taken price hikes in selective products to offset the inflationary pressure. Inspite of these hikes, the double-digit volume growth indicates the robust sector potential and Colgate’s strong position.

  • Colgate continued its leadership position in the toothpaste category, while its market share increased to 37.2% for the Jan to May 2008 period in the toothbrush segment. Colgate has recently entered the Rs 2 bn red toothpowder market with its brand Cibaca Red toothpowder. It is witnessing good performance and has increased its market share to 45.9% for the Jan to May 2008 period.

    Cost break-up
    As a % of net sales 1QFY08 1QFY09
    Total Cost of goods 43.5% 43.0%
    Staff Cost 6.4% 8.1%
    Advertising 15.0% 17.0%
    Other Expenditure 17.6% 15.7%

  • The margins for the quarter declined by 130 basis points (1.3%). Raw material and other expenditure (as percentage of sales) fell. However, labour costs were higher at 8% of sales. The company continued to invest in equity and brand building activities with the advertising and sales promotion expenditure increasing by 32% YoY.

  • Excluding the extraordinary item (VRS), Colgate’s net profits grew by 16% YoY. This growth was higher than the growth in operating profits due to a higher other income. The tax rate increased from 20.6% in 1QFY08 to 21.3% in this quarter.

What to expect?
At the current price of Rs 350, the stock is trading at a price to earnings multiple of 15.5 times our FY11 estimated earnings. The company has yet again done well on the volumes front, thus maintaining its market share. Colgate’s strong presence across the oral care pyramid has aided it to capture opportunities arising from low penetration of oral care products in the country. Though the company did witness margin pressure on account of higher ad spends given that the sector is highly competitive, the move to invest in brand building is expected to pay off in the long run and this has been amply demonstrated by the fact that Colgate continues to increase its market share. In inflationary times, Colgate is best placed in the oral care segment on account of its offerings across segments and price points. We maintain our positive view on the stock.

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