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Colgate: Lower wages boost operating margin - Views on News from Equitymaster
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Colgate: Lower wages boost operating margin
Aug 5, 2014

Colgate-Palmolive (India) Limited has announced its first quarter results for financial year 2014-15 (1QFY15) results. The company has reported a 13% YoY increase in sales and 27% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Topline grew by 11% YoY in 1QFY15 on 5% volume growth.
  • Operating margin expanded by 1% YoY in 1QFY15 aided by lower staff costs and rationalization in raw material costs in proportion to sales.
  • Net profits fell by 27% as the company had earned extraordinary income of Rs 706 m in the year-ago quarter. Excluding the impact of this income net of tax, profits were up by 4% YoY.

Standalone financial snapshot
(Rs m) 1QFY14 1QFY15 change
Total Revenue 8,597 9,569 11.3%
Expenditure 6,944 7,632 9.9%
Operating profit (EBDITA) 1,653 1,937 17.2%
EBDITA margin (%) 19.2% 20.2% 1.0%
Other income 171 65 -62.3%
Interest - -  
Depreciation 117 166 41.0%
Profit before tax 1,707 1,836 7.6%
Extraordinary item 706 -  
Tax 561 487 -13.2%
Profit after tax/(loss) 1,852 1,349 -27.2%
Net profit margin (%) 21.5% 14.1% -7.4%
No. of shares (m)   136  
Diluted earnings per share (Rs)*   35.4  
Price to earnings ratio (x)*   43.7  
* Trailing 12-month earnings

What has driven performance in 1QFY15?
  • Colgate clocked a 11% YoY revenue growth led by 5% volume growth in toothpastes. The company continued to enhance its leadership position in the toothpaste category growing its volume market share by 110 basis points YoY to 57% for the period Jan-June 2014. In the toothbrush category, its volume market share rose by 140 basis points YoY to 42.6% during the period Jan-June 2014. During the quarter, the company has launched a new toothpaste Colgate Maximum Cavity Protection plus Sugar acid Neutralizer with an innovative technology to fight sugar acids. The company has also introduced teeth whitening treatment that includes toothpaste, toothbrush and mouthwash. Additionally, Colgate has also launched toothpaste with charcoal tipped bristles to remove plaque bacteria.

    As a % of net sales 1QFY14 1QFY15 Change in basis points
    Cost of goods 38.18% 37.33% -85.15
    Staff costs 7.2% 6.1% -110.87
    Advertisement 18.1% 18.9% 74.77
    Other expenditure 17.3% 17.5% 19.98

  • The operating margin improved by 1% YoY backed by a 6% reduction in staff costs. Rationalization of raw material costs has led to a fall in cost of goods sold to sales ratio by 0.9% YoY to 37.3%. These savings more than offset higher ad-spends and other expenses (all as a proportion of sales) resulting in higher profitability for the quarter.

  • On account of extraordinary income of Rs 706 m earned from slump sale of Global Shared Services Organization in 1QFY14, net profits in 1QFY15 were down by 27%. Excluding the impact of extraordinary income net of tax, net profits in 1QFY15 were up by 4% YoY but the net margin has contracted by 0.9% to 14%. Steep rise in depreciation coupled with a 62% drop in other income have resulted in margin erosion for the quarter. Even tax incidence has risen to 27% in 1QFY15 from 24% in 1QFY14.
What to expect?
Colgate's operating margin has improved backed by lower staff cost. However at the net level, margin has contracted due to higher depreciation charges as well as rising tax incidence. But the company's prospects remain bright on the back of leadership position, brand strength and huge distribution network. The company has also been launching several innovative products to capitilaize on growing demand from premiumization. Colgate had commissioned a toothpaste facility at Sanad in Gujarat in March 2014. The company will also commission its toothbrush facility at Sricity in Andhra Pradesh in the fourth quarter of 2014.

At a price of Rs 1,547, the stock is trading at 26 times FY17 earnings. We had given a BUY at lower level on this stock. At current valuations, the stock does not offer sufficient margin of safety and we re-iterate a SELL on the stock at current levels.

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