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Colgate: Smiles everywhere - Views on News from Equitymaster

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Colgate: Smiles everywhere
Jul 17, 2009

Performance summary
  • Topline grows by 12% YoY in 1QFY10 led by strong double digit volume growth.
  • Operating margins improve by 3.5% due to lower ad spends and other expenses as a percent of sales
  • Bottomline jumps 43% YoY for the quarter led by expansion in margins and higher other income.


Financial snapshot
(Rs m) 1QFY09 1QFY10 % change
Sales 4,076 4,680 14.8%
Other operating income 253 174 -31.1%
Net sales 4,329 4,854 12.1%
Expenditure 3,387 3,629 7.1%
Operating profit (EBDITA) 942 1,225 30.1%
EBDITA margin (%) 21.8% 25.2%  
Other income 31 86 175.9%
Interest 4 5 7.1%
Depreciation 55 56 2.2%
Profit before tax 913 1,250 36.9%
Extraordinary item - -  
Tax 194 223 14.8%
Profit after tax/(loss) 719 1,027 42.8%
Net profit margin (%) 16.6% 21.2%  
No. of shares (m) 136.0 136.0  
Diluted earnings per share (Rs)*   23.6  
Price to earnings ratio (x)*   27.3  
* Trailing 12-month earnings

What has driven performance in 1QFY10?
  • Colgate saw a net sales growth of 12% YoY during 1QFY10. The sales from its core activity reported a 15% YoY growth. This was led by a 12% YoY volume growth, with balance being the price hike. It had taken a price hike of around 2% to 3% across some products during April 2009.The toothpaste category grew by 14% YoY, with flagship brands continuing with their strong performance. The company yet again saw improvement in its market share. Share in toothpaste category touched 52.3% from 52.2% (Jan – March 09). Toothbrush and toothpowder shares also improved to 38.2% and 48.8% respectively. Low penetration level, strong investments into its brands and focus on its core business has continued to benefit Colgate and this was clearly visible from the strong volume growth and increase in market share.

    Cost break-up
    As a % of net sales 1QFY09 1QFY10
    Total Cost of goods 40.5% 42.2%
    Staff Cost 7.6% 8.0%
    Advertising 16.0% 12.0%
    Other Expenditure 14.2% 12.5%

  • The operating margins during 1QFY10 improved from 22% to 25%. The main reason for the expansion was lower ad spends and other expenses as a percent of sales. The ad spends declined by 16% YoY due to no new launches and lower media inflation. The expansion in margins would have been more but for higher input prices which saw an increase of 17% YoY. The company has done well than our estimates on the margin front.

  • On the bottomline front, the company reported a 43% YoY growth. Strong margin expansion and higher other income aided the growth. The tax outgo was also lower as the tax rate declined to 18% as compared to 21% during 1QFY09. The company has increased its production from the tax free zone, thereby lowering the tax expense.

What to expect?
At the current price of Rs 645, the stock is trading at a price to earnings multiple of 20.5 times our FY11 estimated earnings. While the topline has been in line in with our estimates, the margins are higher than our estimates. The company’s investments are paying off as indicated by strong volume growth and increase in market share. Colgate’s focus on regional strategies rather than on one national strategy to fight competition is also helping it in reporting robust rural and urban growth. Colgate with its dominant position in Indian oral care markets is well poised to capture industry growth. We remain positive on its long term growth going forward.

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