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Colgate: Efficiency focus continues…

Oct 16, 2003

Colgate Palmolive continues to grow its bottomline led by improvement in margins. In the early part of FY04, the company had cut prices of its oral care products (15%-17%). This of course has benefited Colgate in terms of volume growth. But value growth continues to elude the company.

(Rs m) 2QFY03 2QFY04 Change 1HFY03 1HFY04 Change
Net Sales (incl. Excise duty) 2,640 2,555 -3.2% 5,262 5,075 -3.6%
Other Income 58 63 8.4% 122 142 16.3%
Expenditure 2,305 2,217 -3.8% 4,624 4,438 -4.0%
Operating Profit (EBDIT) 335 338 0.7% 638 637 -0.2%
Operating Profit Margin (%) 12.7% 13.2%   12.1% 12.5%  
Interest 1 1 40.0% 1 2 140.0%
Depreciation 52 41 -21.3% 104 83 -20.3%
Profit before Tax 340 358 5.3% 655 693 5.8%
Tax 150 126 -15.8% 277 254 -8.2%
Profit after Tax 190 232 22.0% 378 439 16.1%
Net profit margin (%) 7.2% 9.1%   7.2% 8.6%  
Effective tax rate (%) 44.1% 35.3%   42.3% 36.7%  
No. of Shares (eoy) (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share (Rs)* 5.6 6.8   5.6 6.5  
P/E ratio (x)   21.7     22.9  
(* annualised)            

The encouraging aspect of Colgate's performance is that it was successful in delivering on the volumes front, which has been a concern for the company in the past. Also, the company continued to focus on costs. This helped the company in expanding its operating margins yet again to 13.2%. This has come about largely due to reduction in other expenditure as a percentage of sales and lower advertising expenditure. Colgate, as we know, is one of the largest advertising spenders in the FMCG segment. Its ad to sales expenses were among the highest at 18% to 21%. However, in the past couple of years, its ad to sales ratio has continuously been going downhill. Its ad to sales ratio during the September quarter stood at 15.3% (as compared to 17.4% in 2QFY03 and 23.4% in 2QFY02).

Cost break-up
as a % of net sales 2QFY03 2QFY04 1HFY03 1HFY04
Total Cost of goods 48.8% 52.6% 49.8% 53.7%
- Staff Cost 6.0% 5.8% 6.1% 6.3%
- Advertising 17.4% 15.3% 18.3% 14.6%
- Other Expenditure 15.1% 13.0% 13.7% 12.8%

The advertising spend has declined 15% YoY during September quarter. The likely reason for this seems that buying TRP is much cheaper on a YoY basis. Also, the FMCG sector is spending more on promotions (like freebies) and also is taking on the competition with price cuts. As a result, value sales are declining, but so are advertising costs.

Though we continue to be concerned with the decline in value sales, the fact that it has kick-started volume growth is encouraging. Compared to an over 9% YoY dip in topline during September quarter last year, the current September quarter has been much better. The company has also introduced more personal care products under the Palmolive range (Aroma therapy). Though this is unlikely to make a significant contribution to Colgate's topline in the near term, going forward, the product range may continue to expand and contribute to the topline.

At Rs 148 the stock trades at 22.9x annualised 1HFY04 earnings, market cap to sales ratio of 2x. The company has given out an interim dividend of Rs 2.25 per share during September 2003. Though the company continues to log in bottomline growth, it is unlikely to do so continuously. For a largely single product FMCG company like Colgate, adspend plays a large part in its growth strategy. Therefore, the company is unlikely to be able to continuously reduce ad spends. Consequently, the focus for the investor should be on the company's plans and strategies for topline growth.

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