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Colgate: Margins remain under pressure - Views on News from Equitymaster

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Colgate: Margins remain under pressure
Jul 23, 2012

Colgate-Palmolive (India) Limited has announced its first quarter results for financial year 2012-13 (1QFY13) results. The company has reported a 20.5% YoY increase in sales and 17% YoY jump in net profits. Here is our analysis of the results.

Performance summary
  • Led by 11% volume growth, Colgate reported a 20.5% increase in sales in 1QFY13.
  • The company has been able to marginally improve its operating profitability on the back of a steep cut in other expenses (as a percentage of sales).
  • However, at the net level margins declined by 50 basis points due to double-digit rise in depreciation and tax expenses coupled with a 19% fall in other income earned.

Standalone financial snapshot
(Rs m) 1QFY12 1QFY13 change
Total Revenue 6,277 7,561 20.4%
Expenditure 4,942 5,936 20.1%
Operating profit (EBDITA) 1,335 1,625 21.7%
EBDITA margin (%) 21.3% 21.5%  
Other income 138 112 -18.9%
Interest 4 -  
Depreciation 88 105 19.4%
Profit before tax 1,381 1,632 18.1%
Extraordinary item - -  
Tax 377 457 21.4%
Profit after tax/(loss) 1,004 1,174 16.9%
Net profit margin (%) 16.0% 15.5%  
No. of shares (m)   136  
Diluted earnings per share (Rs)* 34.0  
Price to earnings ratio (x)*   34.3  
* Trailing 12-month earnings

What has driven performance in 4QFY12?
  • Colgate's revenues increased by 20% in 1QFY13 driven by 11% volume growth. The company enhanced its leadership position in the toothpaste category to 54.5% volume market share from 52.4% in the year-ago period. Colgate strengthened its market leadership position in the toothbrush category to 38.2% from 36.3% in the corresponding period last year. In the mouthwash category the company's recent Colgate Plax Fresh Tea offering further added to its growth momentum.

    As a % of net sales 1QFY12 1QFY13 Change in basis points
    Cost of goods 39.29% 39.64% 34.59
    Staff costs 7.9% 8.3% 31.76
    Advertisement 10.1% 11.1% 97.14
    Other expenditure 21.4% 19.5% -185.05

  • Judicious price increases and prude cost management enabled Colgate to improve its operating profitability during the quarter. The company's other expenses (as a percentage of sales) dropped by 185 basis points. This has more than offset the over 30 basis points rise in each of the raw material and staff costs as well as a 97 basis points jump in adspends (all as a percentage of sales).

  • But net margins fell by 50 basis points to 15.5% due to double-digit increases in depreciation and tax outgo. The tax incidence increased to 28% from 27% in the year-ago quarter. Even other income earned during the quarter was down by 19%.

What we expect?
At a price of Rs 1168, the stock is trading at 23 times our estimated FY15 earnings. We had given a SELL on this stock. At current valuations, the stock appears overpriced and we would advise investors to exercise caution.

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