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Colgate: Lower adspend boosts margins
Jan 24, 2012

Colgate-Palmolive (India) Limited has announced its third quarter results for financial year 2011-12 (3QFY12) results. The company has reported a 20% YoY increase in sales and 74.5% YoY jump in net profits. Here is our analysis of the results.

Performance summary
  • Sales grew by 20% YoY in 3QFY12 led by 15% YoY volume growth in the toothpaste category. For 9mFY12, sales increased by 18.2% YoY.
  • Operating (EBITDA) margin for the quarter expanded by 550 basis points as a steep cut in advertisement spends and lower staff costs offset higher raw material and other expenditure. However for 9mFY12, a sharp rise in cost of goods sold and promotional spends shaved off 180 basis points from the operating margin.
  • Backed by high operating income, a steep cut in interest cost and lower tax-to-PBT ratio, the net profit surged by 74.5% YoY in 3QFY12. During 9mFY12, earnings were up by 9.4% YoY.

Standalone financial snapshot
(Rs m) 3QFY11 3QFY12 change 9mFY11 9mFY12 change
Total Revenue 5,766 6,898 19.6% 16,956 19,947 17.6%
Expenditure 4,836 5,405 11.8% 13,130 15,791 20.3%
Operating profit (EBDITA) 931 1,493 60.4% 3,826 4,156 8.6%
EBDITA margin (%) 16.1% 21.6%   22.6% 20.8%  
Other income 92 97 5.4% 227 312 37.2%
Interest 19 6 -70.0% 29 19 -32.3%
Depreciation 91 99 8.9% 255 293 15.1%
Profit before tax 913 1,485 62.7% 3,771 4,156 10.2%
Extraordinary item - -   - -  
Tax 250 330 31.6% 885 999 12.8%
Profit after tax/(loss) 662 1,156 74.5% 2,885 3,157 9.4%
Net profit margin (%) 11.5% 16.8%   17.0% 15.8%  
No. of shares (m)         136  
Diluted earnings per share (Rs)*         31.6  
Price to earnings ratio (x)*         31.2  
* Trailing 12-month earnings

What has driven performance in 3QFY12?
    Consolidated performance snapshot
    As a % of net sales 3QFY11 3QFY12 Change in basis points 9mFY11 9mFY12 Change in basis points
    Cost of material 37.46% 38.43% 97.73 37.3% 38.9% 156.18
    Staff costs 9.1% 7.7% -133.86 8.8% 8.2% -63.95
    Advertisement 20.9% 15.6% -532.93 15.9% 16.1% 21.28
    Other expenditure 16.4% 16.6% 18.40 15.4% 16.0% 59.24

  • Colgate clocked 20% YoY sales growth in 3QFY12 driven by 15% YoY growth in offtake of toothpastes. The company maintained its leadership position in the toothpaste category with a market share of 52.5% during the period (Dec 2010 Nov 2011) .The Company continued to register strong growth in the mouthwash category with its market share reaching 27.4% over the same period.

  • The company's operating profitability increased significantly in 3QFY12 on the back of a 11% cut in advertisement & promotional expenses. This coupled with controlled staff costs have offset higher raw material costs and other expenses. During the quarter, the proportion of cost of goods sold in sales increased to 38.4% from 37.4% in the year-ago quarter. The company is setting up a toothpaste manufacturing plant at Sanad, in Gujarat. During the quarter, the company has paid Rs 426 m to acquire leasehold land for the facility and consequently its other expenditure grew by 21%.

  • Net profit leap-frogged by 74.5% riding on a 60.4% jump in operating income and a 70% reduction in interest costs on a YoY basis. Even the tax incidence as measured by tax-to-PBT ratio fell to 22% from 27% in the year-ago quarter. The company's other income component grew by 5.4% YoY during the quarter.

What to expect?
At a price of Rs 985, the stock is trading at 25 times our estimated FY14 earnings. Since the start of FY12, the company's margins were under pressure due to steep jump in promotional spends to tackle competition. However in 3QFY12, Colgate has cut down its adspends substantially and managed to expand margins. At the same time the company has been able to maintain its leadership position in the toothpaste segment and gain significant market share in the mouthwash segment. The company is setting up a toothpaste facility at Sanand, in Gujarat. However, the company is fairly valued at current levels and we would advise investors to exercise caution.

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