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Colgate: Buoyancy continues

Oct 20, 2004

Performance summary
Oral care major, Colgate Palmolive, has seen continued buoyancy in revenues during the September quarter. Its topline has grown by 6.5% during the quarter (almost at the same rate as in June quarter), led by volume growth in its core business of oral care. Continued operating margin improvement led the company to report a strong 16% bottomline growth during the quarter.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net Sales 2,307 2,457 6.5% 4,578 4,884 6.7%
Expenditure 1,969 2,015 2.3% 3,941 4,038 2.5%
Operating Profit (EBDITA) 338 442 31.0% 637 846 32.8%
EBDITA margin (%) 14.6% 18.0%   13.9% 17.3%  
Other income 63 54 -13.8% 142 110 -22.6%
Interest 1 3 78.6% 2 5 160.0%
Depreciation 41 48 17.6% 83 94 12.7%
Profit before Tax 358 446 24.5% 693 856 23.5%
Tax 126 176 39.4% 255 332 30.5%
Profit after Tax 232 270 16.4% 439 524 19.5%
Net profit margin (%) 10.0% 11.0%   9.6% 10.7%  
Effective tax rate (%) 35.3% 39.5%   36.7% 38.8%  
No. of Shares (m) 136.0 136.0   136.0 136.0  
Diluted Earnings per share (Rs)* 6.8 7.9   6.5 7.7  
P/E ratio (x)         18.9  
(* annualised)            

What is the company’s business?
The Colgate name 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 India earns around 95% of its revenues from the oral care segment. The company is the leader in the 90,000 TPA oral care market with nearly 50% share. The oral care market has a penetration of only around 42% 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).

What has driven performance in 1QFY05?
Sales: The company undertook around 15%-17% price reduction in its overall toothpaste portfolio during most of FY04. The encouraging thing to note was that despite the sharp price cuts, value decline in sales was not that significant in FY04 (only down 0.9%). In the first half of FY05, the company has witnessed double digit volume growth, led by buoyancy in lower priced product categories. Strong volume growth was evident in its flagship brand 'Colgate Dental Cream' (CDC) and Colgate Cibaca. Also, its toothpowder continued to gain share in its segment (current market share at 51% as per the company). These were the key reasons for the growth in topline during the June and September quarters.

Cost break-up
as a % of net sales 2QFY04 2QFY05 1HFY04 1HFY05
Total Cost of goods 51.3% 51.1% 52.4% 51.0%
Staff Cost 6.4% 7.3% 7.0% 6.8%
Advertising 17.0% 14.4% 16.2% 15.2%
Other Expenditure 10.7% 9.2% 10.4% 9.7%
Total expenditure 85.4% 82.0% 86.1% 82.7%

Operating margins: In FY04, one of the key reasons for the improvement in operating margins was the cost cutting on the advertising front. Ad expenses as a percentage of sales declined from nearly 20% in FY03 to about 16% in FY04. This has continued 2QFY05 as well (ad expense as percentage of sales stood at 14.4% in 2QFY05, as compared to 17% in 2QFY04). Cost cutting in other expenses head also led to the improvement in operating margins. Colgate's 16% net profit growth was led by the significant improvement on the operating margin front. The improvement in OPM was enough to counter nearly 14% fall in other income and higher interest and depreciation expenses.

Over the last five quarters
  2QFY04 3QFY04 4QFY04 1QFY05 2QFY05
Sales growth (YoY) -3.2% 3.4% -0.6% 6.8% 6.5%
Advertising as % of sales 15.3% 16.2% 12.2% 16.0% 14.4%
OPM (%) 13.2% 12.9% 20.2% 16.6% 18.0%
Net profit growth (YoY) 22.0% 30.1% 23.2% 23.0% 16.4%

What to expect?
At the current price of Rs 146, the stock trades at 19x annualised 1HFY05 earnings and market cap. to sales of 2x. Owing to the renewed strength in the topline the stock may see some more upside. However, the prospects of the company are still too leveraged on one product, which is facing intense competition in the market. It is early days yet to comment on whether this topline growth trend will sustain. Operating margin expansion too may be limited from here on.


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