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Colgate: Caught in a fix

Oct 25, 2001

Colgate-Palmolive India has posted a net profit of Rs 165 m in 2QFY02. The company's sales growth declined marginally to Rs 2,930 m during the quarter. The slowdown seems to have affected Colgate's topline growth.

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Net Sales (incl. Excise duty) 2,948 2,930 -0.6% 5,823 5,996 3.0%
Other Income 50 94 88.0% 85 165 94.1%
Expenditure 2,729 2,720 -0.3% 5,364 5,560 3.7%
Operating Profit (EBDIT) 219 210 -4.1% 459 436 -5.0%
Operating Profit Margin (%) 7.4% 7.2%   7.9% 7.3%  
Interest 0 2 - 0 4 -
Depreciation 43 40 -7.0% 93 82 -11.8%
Profit before Tax 226 262 15.9% 451 515 14.2%
Extraordinary income 42 0   42 0  
Tax 92 97 5.4% 183 192 4.9%
Profit after Tax 176 165 -6.3% 310 323 4.2%
Net profit margin (%) 6.0% 5.6%   5.3% 5.4%  
Effective tax rate (%) 40.7% 37.0%   40.6% 37.3%  
No. of Shares (eoy) (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share* 5.2 4.9   4.6 4.8  
P/E ratio   33.4     34.1  
(* annualised)            

On first glance, Colgate's bottomline has declined by 6% YoY. However, Colgate had earned an extraordinary income in the previous year by sale of residential property. If we exclude this, the Colgate's bottomline has actually surged by 23%.

But Colgate has earned a huge dividend from its Nepal subsidiary, both in the first quarter and the second quarter of FY02. The total dividend earned in 1HFY02 amounts to around Rs 75 m. It is based on this that Colgate has seen a huge surge in other income both in first and second quarter of FY02.

If we therefore, only look at the operational performance, we realise that in the second quarter operating margins have slipped marginally and that too because of a sluggish topline. However, Colgate's inability to cut its advertising costs have really affected the company's profitability.

Cost structure
(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Raw material/packaging cost 1,613 1,490 -7.6% 3,216 3,121 -3.0%
Staff cost 131 154 17.6% 264 305 15.5%
Advertising 561 685 22.1% 1,065 1,343 26.1%
Others 424 391 -7.8% 819 791 -3.4%
Total 2,729 2,720 -0.3% 5,364 5,560 3.7%

If we look at the cost structure then Colgate has managed to keep its material costs under control. However, its staff cost has escalated and so has its advertising expense. Its Colgate's ad expenses that have been causing problems to the company's financials. Colgate's ad spend to sales ratio is the highest in the FMCG sector at 23% in 2QFY02. The company is caught in a fix wherein it has to spend more on advertising to keep its turf safe from HLL. However, this move does not seem to be paying off. With the economic slowdown as well as increasing competitive pressure from HLL, the company has faced pressure both on margins as well as the topline.

At the current price of Rs 162 the stock trades at a P/E of 34x annualised 1HFY02 earnings. The stock is likely to see weakness in the days to follow.

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