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Colgate: Efficiencies aid bottomline

Jul 29, 2002

Oral care major, Colgate Palmolive India, has recorded a 15% dip in 1QFY03 net sales led by aggressive price competitiveness. The company has however, recorded a 19% growth in bottomline led by higher operating efficiencies.

(Rs m)1QFY021QFY03%Change
Net Sales (incl. Excise duty) 3,066 2,622 -14.5%
Other Income 71 64 -9.9%
Expenditure 2,840 2,319 -18.3%
Operating Profit (EBDIT) 226 303 34.1%
Operating Profit Margin (%)7.4%11.6%
Interest 2 0 -
Depreciation 42 52 23.8%
Profit before Tax 253 315 24.5%
Tax 95 127 33.7%
Profit after Tax 158 188 19.0%
Net profit margin (%)5.2%7.2%
No. of Shares (eoy) (m) 136.0 136.0
Diluted Earnings per share* 4.6 5.5
P/E (at current price)24.6
(*- annualised)

The fact that HLL has lost some share in oral care during the June quarter, points to the fact that Colgate has gained some share back. However, the HLL management did indicate that Colgate has been able to do this by aggressive pricing posture. Both Colgate and HLL have indicated that the market for oral care products has not grown in FY02 and continues to be stagnant till date. Though Colgate, on a value basis, has logged in a topline decline for the quarter, on the volume front it has gained share. According to Colgate's press release, its All India toothpaste volume market share has improved to 50.6% in May 2002 (up from 49.9% in March 2002).

Cost break-up
(Rs m)1QFY021QFY03% change
- (Increase) / decrease in stock in trade10158
- Raw & Packing Material Cost401312
- Purchase of Goods1,129962
Total Cost of goods1,6311,332-18.3%
Staff Cost1511627.3%
Advertising658502-23.7%
Other Expenditure400323-19.3%
Total expenditure2,8402,319-18.3%

The reason for its 19% growth in profits is a significant improvement in operating margins (more than 400 basis point). This has come about largely due to efficiencies in working capital as well as pruning of the advertising expenditure. Colgate, as we know is one of the largest advertising spenders in the FMCG segment. Its ad to sales expenses are among the highest at 19% to 21%. Its ad to sales ratio during the June quarter stood at 19.1% (as compared to 21.5% in 1QFY02).

Though Colgate's performance is encouraging from the net profit angle, the topline continues to be a concern. The oral care market continues to stagnate at 90,000 tonnes per annum (Rs 21 bn). With both HLL and Colgate facing resistance in growing this pie, growth issues continue to haunt valuations. At Rs 136 the stock trades at 25x annualised 1QFY03 earnings.

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