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Colgate: Cost squeeze aids bottomline

Oct 23, 2002

Colgate Palmolive India (Colgate) continues with its bottomline growth led by operating efficiencies. But concerns over topline dip continue to haunt the oral care major. In September quarter, the company has reported a 10% dip in topline, but logged in a 15% growth in net profit.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Net Sales (incl. Excise duty)2,9302,640-9.9%5,9965,262-12.2%
Other Income9458-38.3%165122-26.1%
Expenditure2,7202,305-15.3%5,5604,624-16.8%
Operating Profit (EBDIT)21033559.5%43663846.3%
Operating Profit Margin (%)7.2%12.7% 7.3%12.1% 
Interest 21-50.0%41-75.0%
Depreciation405230.0%8210426.8%
Profit before Tax26234029.8%51565527.2%
Tax9715054.6%19227744.3%
Profit after Tax16519015.2%32337817.0%
Net profit margin (%)5.6%7.2% 5.4%7.2% 
Effective tax rate (%)37.0%44.1% 37.3%42.3% 
No. of Shares (eoy) (m)136.0136.0 136.0136.0 
Diluted earnings per share*4.95.6 4.85.6 
P/E ratio 23.8  23.9 
(* annualised)      

The reason for the 15% growth in profits is a significant improvement in operating margins (by 560 basis points). This has come about largely due to efficiencies in working capital as well as pruning of the advertising expenditure. Colgate, as we know is one of the largest advertising spenders in the FMCG segment. Its ad to sales expenses are among the highest at 19% to 21%. Its ad to sales ratio during the September quarter stood at 17.4% (as compared to 23.4% in 2QFY02).

Cost break-up
as a % of net sales2QFY022QFY031HFY021HFY03
Total Cost of goods50.9%48.8%52.1%49.8%
- Staff Cost5.3%6.0%5.1%6.1%
- Advertising23.4%17.4%22.4%18.3%
- Other Expenditure13.3%15.1%13.2%13.7%

The advertising spend has declined 33% 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 one for one schemes). As a result, value sales are declining, but so are advertising costs.

Though Colgate's performance is encouraging from the net profit angle, the topline continues to be a concern. The oral care market continues to stagnate at 90,000 tonnes per annum (Rs 21 bn). With both HLL and Colgate facing resistance in growing this pie, growth issues continue to haunt valuations. At Rs 133 the stock trades at 24x annualised 1HFY03 earnings, market cap to sales ratio of 1.7x.

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