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Colgate: Tax pains weigh on bottomline

Jul 25, 2011

Colgate-Palmolive (India) Limited has announced its first quarter results for financial year 2011-2012 (1QFY12) results. The company has reported a 14.5% YoY gain in sales and 17.7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales for Colgate grew by 14.5% YoY during the quarter.
  • Operating (EBITDA) margins for the quarter fell by 7.6% to stand at 21.5% on the back of increase in raw material costs, advertisement expense and other expenditure.
  • Net profit fell by 17.7% during the quarter. This fall has been due to fall in operating income and higher effective tax rate partially offset by higher other income.

(Rs m) 1QFY11 1QFY12 change
Net sales 5,497 6,294 14.5%
Expenditure 3,898 4,938 26.7%
Operating profit (EBDITA) 1,599 1,356 -15.2%
EBDITA margin (%) 29.1% 21.5%  
Other income 54 120 122.3%
Interest 3 6 79.4%
Depreciation 79 88 10.8%
Profit before tax 1,570 1,381 -12.0%
Extraordinary item - -  
Tax 350 377 7.6%
Profit after tax/(loss) 1,220 1,004 -17.7%
Net profit margin (%) 22.2% 16.0%  
No. of shares (m) 136 136  
Diluted earnings per share (Rs)*   28.0  
Price to earnings ratio (x)*   35.0  
* Trailing 12-month earnings

What has driven performance in 1QFY12?
  • During the quarter, the company witnessed a volume growth of 12% YoY coming on the back of strong sales growth of 14% YoY in the toothpaste category. The category maintained its volume market share at 53% during the quarter. Contribution from flagship brands like Colgate Dental Cream, Colgate Sensitive, Active Salt, Max Fresh and Colgate Total contributed to the strong growth. Toothbrush category also saw strong sales and maintained its market share at 40%. New category of mouthwash grew sharply. Market share of Plax mouthwash increased to 24% for the quarter. Low penetration level, strong investments into its brands and focus on its core business has continued to benefit Colgate and this is clearly visible from the strong volume growth. During the quarter, the company launched Colgate 360 Sensitive Pro-Relief Toothbrush, Colgate Plax Sensitive Mouthwash, Colgate Plax Complete Care Mouthwash and Colgate Sensitive Pro-Relief Toothpaste.

    Cost break-up
    As a % of net sales 1QFY11 1QFY12
    Cost of material 35.8% 39.2%
    Staff costs 8.1% 7.9%
    Advertisement 12.6% 15.7%
    Other expenditure 14.5% 15.7%

  • Operating margins fell by 7.6% YoY. The main reason was increase in cost of material, advertisement cost and other expenditure (all as a percentage of sales). Raw material costs increased by 25% YoY while advertisement costs and other expenditure increased by 42% YoY and 24% YoY respectively. Advertisement expenses grew sharply as a result of brand building for new launches during the quarter.

  • Bottom line fell by 17.7% YoY during the year as a result of fall in operating income and higher effective tax rate. Operating income fell by 15% YoY while effective tax rate increased from 22% in 1QFY11 to 27% in 1QFY12. Effective tax rate came in higher as the company exhausted its 100% tax exemption at its Baddi plant. However, increase of 122% YoY in other income helped support the bottom line.

What we expect?
At a price of Rs 978, the stock is trading at 25 times our estimated FY14 earnings. Colgate’s investment in brand building has paid off as seen from a strong volume growth . We believe that the company with its dominant position in Indian oral care markets is well poised to capture industry growth. However, with new entrants on the horizon, competition is set to intensify and this may affect the company margins going forward. For these reasons we believe that growth from a 2 - 3 year horizon is already priced in the stock.

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Jun 25, 2021 01:18 PM


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