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Colgate: Mixed quarter - Views on News from Equitymaster

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Colgate: Mixed quarter
Oct 26, 2007

Performance summary
  • Colgate reports a 13.7% YoY growth in the topline during 2QFY08 led by higher volume sales.

  • Operating margins decline by 3.5% YoY mainly due to a rise in the advertisement costs as percentage of net sales.

  • Higher interest and tax outgo leads to the bottomline fall by 33% YoY (excluding extraordinary- VRS expenses)

  • For 1HFY07, topline grows by 13.5% YoY, bottomline declines by 1.9% YoY.

(Rs m) 2QFY07 2QFY08 % change 1HFY07 1HFY08 % change
Net sales 3,200 3,639 13.7% 6,296 7,146 13.5%
Expenditure 2,592 3,074 18.6% 5,287 5,967 12.9%
Operating profit (EBDITA) 608 565 -7.1% 1,009 1,179 16.8%
EBDITA margin (%) 19.0% 15.5%   16.0% 16.5%  
Other income 182 196 7.6% 330 406 23.0%
Interest 2 6 150.0% 4 9 102.4%
Depreciation 36 49 38.5% 73 93 28.5%
Profit before tax 752 706 -6.2% 1,262 1,483 17.5%
Extraordinary item (588) -   (588) (10)  
Tax -67 158 -335.7% 82 316 285.2%
Profit after tax/(loss) 231 548 136.9% 592 1,157 95.3%
Net profit margin (%) 7.2% 15.1%   9.4% 16.2%  
No. of shares (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share (Rs)*         15.9  
Price to earnings ratio (x)*         24.2  
* Trailing 12-month earnings

What is the company’s business?
The ‘Colgate’ brand 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 earns around 95% of its revenues from the oral care segment. The company leads the 90,000 TPA oral care market with nearly 50% share. The oral care market has a penetration of only around 49% 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). The company has discontinued the manufacture of toilet bar soaps (Palmolive) from 3QFY06, which it now imports through one of the subsidiaries of its parent.

What has driven performance in 2QFY08?
Volume driven growth: Colgate achieved a volume growth of 7% YoY in 1HFY08, thereby leading to a topline growth of 13.5% YoY. Its market share in toothpaste category improved to 49.1% (January-August period) due to a 9% jump in the sales. Colgate Dental Cream, Active Salt, Max Fresh and Cibaca continued to witness strong volume growth. The toothbrush category also witnessed an increase in the market share to 35.1% led by steady volume growth. The higher volumes sales are the result of aggressive brand building activities done by the company. With increasing income and higher penetration, we are positive on its volume sales.

Cost break-up
As a % of net sales 2QFY07 2QFY08 1HFY07 1HFY08
Total Cost of goods 43.5% 42.6% 43.6% 43.1%
Staff Cost 9.3% 8.5% 9.0% 7.4%
Advertising 13.0% 18.2% 15.6% 16.6%
Other Expenditure 15.2% 15.2% 15.7% 16.4%

Ad spends dent margins: Faster growth in operating expenses than the topline growth led to the operating profits fall by 7% YoY in 2QFY08. The main reason was the higher ad spends which increased from 13% (as a % of sales) to 18% in this quarter. The company continues to invest in its equity and brand building activities with the advertising and sales promotion. The benefits of the same are sought to be derived in the longer term. Lower raw material and labour costs got some relief to the margin from falling further. For 1HFY08, the margins are stable at 16%, which are in line with our estimates.

Fall in profits: Lower operating profits, higher interest costs and tax outgo led to the bottomline fall by 33% YoY (excluding extraordinary). For 1HFY08, the net profits fell by 1.1%. The effective tax rate has increased from 6.5% to 21.4% in 1HFY08. The net margins are higher than our estimates.

What to expect?
At the current price of Rs 385, the stock is trading at a price to earnings multiple of 18.9 times our FY10 estimated earnings. The company continues to invest in brand building, which reflects on the topline performance and gain of market share. Improvement in demand, especially from rural markets, increase in toothpaste penetration and gain in market share is likely to enable Colgate to sustain double-digit toothpaste volume growth. However, valuations at current junction look expensive.

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