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Colgate: Launches drive growth - Views on News from Equitymaster

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Colgate: Launches drive growth
Jul 30, 2007

Performance summary
  • Colgate reports a 13% YoY growth in the topline during 1QFY08. Volumes increase by 9% YoY.

  • Operating margins expand by a significant 4.3% YoY mainly due to a substantial fall in labour costs as percentage of net sales and also owing to lower advertisement expenses.

  • The company witnessed a 69% YoY growth in the net profits for 1QFY08.

  • The effective tax rate falls from 29% in 1QFY07 to 21% in this quarter.

(Rs m) 1QFY07 1QFY08 % change
Net sales 3,096 3,507 13.3%
Expenditure 2,695 2,902 7.7%
Operating profit (EBDITA) 401 604 50.8%
EBDITA margin (%) 12.9% 17.2%  
Other income 148 210 42.0%
Interest 2 3 50.0%
Depreciation 37 44 19.5%
Profit before tax 509 767 50.5%
Tax 149 158 6.2%
Profit after tax/(loss) 361 609 68.8%
Net profit margin (%) 11.6% 17.4%  
No. of shares (m) 136.0 136.0  
Diluted earnings per share (Rs)*   13.6  
Price to earnings ratio (x)*   28.1  
* 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 1QFY08?
Launches drive sales: Colgate reported a 13% YoY growth in the topline during 1QFY08. The company achieved a strong 9% YoY volume increase led by a 10% growth in its core toothpaste category.

The company’s market share increased by 0.9% to 49.2% during January to May 2007. Higher sales of its flagship brand Colgate Dental Cream, Cibaca and new launches like Colgate Active Salt and Colgate Max Fresh led to this strong growth.

In the toothbrush category, Colgate re-launched Colgate Motion and Colgate Super Flexible. It also launched Colgate 360º”, which led to the 6% YoY growth in toothbrush volumes. During the period January to May 2007, its market share increased by 0.9% over the same period last year to 35.4%.

In the Personal Care category, Palmolive Thermal Spa range of body washes were introduced which added to the topline performance. The topline is in line with our estimates and we expect this performance to continue going forward.

Cost break-up
As a % of net sales 1QFY07 1QFY08
Total Cost of goods 43.8% 43.5%
Staff Cost 8.7% 6.6%
Advertising 18.3% 15.0%
Other Expenditure 16.3% 17.6%

Healthy margins: During the quarter under review, margins expanded by a significant 4.3% YoY mainly due to a substantial fall in labour costs as percentage of net sales and also owing to lower advertisement expenses. With closure of the Sewri plant, the labour costs fell from 8.7% in 1QFY07 to 6.6% in 1QFY08. The company had been investing substantially in advertisements over the last few quarters. Hence the benefits are already being witnessed with lower ad spends in this quarter and higher sales.

Flows down to the bottomline: The company witnessed a 69% YoY growth in the net profits for 1QFY08. Higher operating margins aided with higher other income led to the growth in the bottomline. Further the company’s effective tax rate fell from 29% in 1QFY07 to 21% in this quarter. The benefits and incentives available from higher production at the toothpaste plant at Baddi have reduced the effective income tax rate. The bottomline growth is marginally above our estimates.

What to expect?
At the current price of Rs 382, the stock is trading at a price to earnings multiple of 18.7 times our FY10 estimated earnings. Colgate’s dominant market leadership in the Indian oral care segment is likely to sustain the double-digit growth going forward. Also, the robust GDP growth which has led to the up gradation from toothpowder to toothpaste and the company’s tie up with rural initiatives such as e-Choupal and Disha is expected to translate into increased sales going forward. Further, the increased contribution from the in house manufacturing facility would also enable the company to avail of higher excise and tax benefits resulting in a substantial decline in the cost of sales.

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