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Colgate: Well begun is half done! - Views on News from Equitymaster
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Colgate: Well begun is half done!
Jul 27, 2006

Introduction to results
Oral care major, Colgate India (Colgate) announced its results for the first quarter ended June 2006 late yesterday. The company has reported a decent topline growth during the quarter, backed by uptrend in oral care consumption, as well as new product launches. Also, on the back of lower cost of goods sold, operating margins have expanded by 100 basis points (1%).

(Rs m) 1QFY06 1QFY07 % change
Net sales 2,583 3,096 19.9%
Expenditure 2,276 2,695 18.4%
Operating profit (EBDITA) 307 401 30.5%
EBDITA margin (%) 11.9% 12.9%  
Other income 140 148 5.8%
Interest 2 2 22.2%
Depreciation 26 37 43.6%
Profit before tax 419 509 21.5%
Tax 140 149 6.7%
Profit after tax/(loss) 280 361 28.9%
Net profit margin (%) 10.8% 11.6%  
No. of shares (m) 136.0 136.0  
Diluted earnings per share (Rs)*   10.7  
Price to earnings ratio (x)*   35.3  
* Trailing 12-month earnings

What is the company’s business?
The ‘Colgate’ brand 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 earns around 95% of its revenues from the oral care segment. The company leads the 90,000 TPA oral care market with nearly 50% share. The oral care market has a penetration of only around 49% 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). The company has discontinued the manufacture of toilet bar soaps (Palmolive) from 3QFY06, which it now imports through one of the subsidiaries of its parent.

What has driven performance in 1QFY07?
Consolidated cost break-up
As a % of net sales 1QFY06 1QFY07
Total Cost of goods 48.3% 43.8%
Staff Cost 8.5% 8.7%
Advertising 17.7% 18.3%
Other Expenditure 13.6% 16.3%
Volume led growth: During 1QFY07, Colgate witnessed a healthy 11% YoY increase in volumes. The company launched 3 new variants (Colgate MaxFresh Gel, Colgate Active Salt and Colgate Advanced Whitening), which have seemingly provided the impetus to volumes growth. Additionally, Colgate’s flagship brand – Colgate Dental Cream – has continued to grow its base business. Toothbrush volumes grew a strong 53% YoY during the quarter, mainly driven by the launch of new Colgate 360° toothbrush in select cities. Colgate’s plant at Baddi in Himachal Pradesh, which was commissioned in April 2005, has stabilized and is now manufacturing the full range of toothpastes.

Higher cost of goods sold dent margins: Lower cost of goods sold (as % of sales) has helped Colgate post a 1% margin expansion during 1QFY07. These expenses have declined from 48.3% of sales in 1QFY06 to 43.8% of sales in 1QFY07. The margin expansion would have been higher but for the rise in advertising, staff and other expenses. As mentioned earlier, the company launched various products in the course of the quarter and in order to increase visibility of these products, it upped its advertising expenses.

Bottomline: Colgate registered a bottomline growth of 29% YoY during the year, mainly helped by higher operating margins and lower effective tax rate (due to Baddi operations) of 29% (33% in 1QFY06).

Over the past few quarters
  1QFY06 2QFY06 3QFY06 4QFY06 1QFY07
Sales growth (YoY) 6.4% 10.8% 21.2% 25.8% 19.9%
Advertising as % of sales 17.7% 18.5% 14.4% 19.7% 18.3%
OPM (%) 16.1% 15.5% 25.0% 15.1% 12.9%
Net profit growth (YoY) 10.1% 14.5% 46.2% 14.4% 11.6%

What to expect?
At the current price of Rs 378, the stock is trading at a price to earnings multiple of 35.3 times its trailing 12-months earnings. Although we are enthused by the company’s performance for the quarter, the fact that its prospects are still too leveraged on one product, which is facing intense competition, remains our chief cause of concern.

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