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Colgate: Exceptional income boosts profits - Views on News from Equitymaster

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Colgate: Exceptional income boosts profits
Aug 1, 2013

Colgate-Palmolive (India) Limited has announced its first quarter results for financial year 2012-13 (1QFY14) results. The company has reported a 14.7% YoY increase in sales and 57.7% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Colgate's topline increased by 13.7% YoY led by 11% growth in toothpastes.
  • The operating margin contracted by 2.3% YoY due to a steep 37% jump in other expenses.
  • However, net profits surged by 57.7% YoY on the back of exceptional income of Rs 555 m from slump sale of Global Shared Services Organization to its foreign parent company's wholly-owned subsidiary.

Standalone financial
(Rs m) 1QFY13 1QFY14 change
Total Revenue 7,561 8,597 13.7%
Expenditure 5,936 6,944 17.0%
Operating profit (EBDITA) 1,625 1,653 1.7%
EBDITA margin (%) 21.5% 19.2%  
Other income 112 171 52.6%
Interest - -  
Depreciation 105 117 11.7%
Profit before tax 1,632 1,707 4.6%
Extraordinary item - 706  
Tax 457 561 22.6%
Profit after tax/(loss) 1,174 1,852 57.7%
Net profit margin (%) 15.5% 21.5%  
No. of shares (m)        136
Diluted earnings per share (Rs)*     41.5
Price to earnings ratio (x)*     32.1
* Trailing 12-month earnings

What has driven performance in 1QFY14?
  • Colgate clocked a 13.7% increase in revenues driven by 9% rise in offtake. The toothpaste segment grew by a strong 11% during the quarter and further enhanced its leadership position by registering a volume market share of 55.9% for 1HFY13 as compared to a share of 54.7% in the year-ago period. In toothbrush category, the company's market share rose to 41.7% in 1HFY13 from a share of 38.7% in the year-ago period.

    As a % of net sales 1QFY13 1QFY14 Change in basis points
    Cost of goods 39.64% 38.18% -145.73
    Staff costs 8.3% 7.2% -104.49
    Advertisement 11.1% 11.8% 72.10
    Other expenditure 19.5% 23.6% 404.11

  • But the robust topline growth failed to expand operating margin due to a steep 37% jump in other expenses. The savings in input cost and wages have been more than offset by other expenditure (all as proportion of sales). Ad spends to sales ratio also grew by 0.7% during the quarter. Resultantly, the operating margin contracted by 2.3%.

  • Riding on the extraordinary income of Rs 555 m from sale of business division, the net profits surged by 57.7% during the quarter. The tax incidence increased to 33% from 28% in the year-ago quarter.

What to expect?

Colgate's profitability continues to remain under pressure. Going forward, with the entry of Procter & Gamble through its Oral B toothpaste, the competitive intensity is expected to rise. Therefore, margins are likely to remain depressed on higher ad-spends.

At a price of Rs 1334, the stock is trading at 27 times our estimated FY15 earnings. We had given a SELL on this stock. At current valuations, the stock is overvalued and we re-iterate a SELL on the stock.

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