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Colgate: Gains market share - Views on News from Equitymaster
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Colgate: Gains market share
Oct 27, 2008

Performance summary
  • Reports a topline growth of 14% YoY and 16% YoY during 2QFY09 and 1HFY09 respectively.
  • Operating margins during 2QFY09 decline by 2.3%, mainly on account of higher raw material and advertisement costs.
  • Higher other income, lower interest costs and tax rates aids the bottomline jump of 16% YoY during the quarter.


(Rs m) 2QFY08 2QFY09 % change 1HFY08 1HFY09 % change
Net sales 3,768 4,302 14.2% 7,445 8,631 15.9%
Expenditure 3,077 3,614 17.4% 5,968 7,001 17.3%
Operating profit (EBDITA) 690 688 -0.3% 1,477 1,630 10.3%
EBDITA margin (%) 18.3% 16.0%   19.8% 18.9%  
Other income 70 93 33.0% 107 124 15.7%
Interest 6 5 -16.4% 9 9 0.0%
Depreciation 49 56 12.8% 93 111 18.5%
Profit before tax 705 721 2.2% 1,482 1,634 10.3%
Extraordinary item - -   10 -  
Tax 158 86 -45.7% 316 280 -11.4%
Profit after tax/(loss) 547 635 16.0% 1,156 1,354 17.1%
Net profit margin (%) 14.5% 14.8%   15.5% 15.7%  
No. of shares (m) 136.0 136.0   136.0 136.0  
Diluted earnings per share (Rs)*         18.9  
Price to earnings ratio (x)*         20.1  
* Trailing 12-month earnings

What has driven performance in 2QFY09?
  • Colgate has reported a topline growth of 14% YoY and 16% YoY during 2QFY09 and 1HFY09 respectively. The company achieved an 11% YoY volume growth during the quarter. The toothpaste category grew by 11.2% YoY with all its key brands performing well. The toothbrush category saw a volume growth of 41.2% YoY during the quarter. In terms of market share, while Colgate has maintained its leadership position in the toothpaste category with a 49.2% share, it gained a 2.7% market share in its toothbrush category. It currently has 37.7% market share. In the toothpowder category, its share increased by 3% to 48.6%. The company has outperformed our FY09 estimates.

    Cost break-up
    As a % of net sales 2QFY08 2QFY09 1HFY08 1HFY09
    Total Cost of goods 41.2% 42.0% 41.3% 41.2%
    Staff Cost 8.2% 7.4% 7.1% 7.5%
    Advertising 17.6% 19.8% 16.0% 17.9%
    Other Expenditure 14.7% 14.8% 15.7% 14.5%

  • The operating margins during 2QFY09 declined by 2.3% mainly on account of higher raw material and advertisement costs as a percent of sales. However, lower labour costs (as a percent of sales) brought some relief. For 1HFY09, the margins declined by 1% mainly on account of higher ad spends which were up 30% YoY. The company continues to invest behind its brands due to strong competitive environment.

  • Higher other income, lower interest costs and tax rates have aided the bottomline jump of 16% YoY during the quarter. The tax rates declined to 11.9% as compared to 22.4% during 2QFY08. Excluding the extraordinary item (VRS), the net profits during 1HFY09 has increased by 16% YoY. The tax rates reduced from 21.3% to 17.1% in 1HFY09. The company’s manufacturing facility at Baddi has accrued some tax advantage.

What to expect?
At the current price of Rs 380, the stock is trading at a price to earnings multiple of 16.8 times our FY11 estimated earnings. Colgate’s continued focus to invest behind brands is aiding the company to gain market share and witness strong volume growth. Though the urban areas are matured, the company has grown through higher market share and has constantly introduced newer variants and higher value products. While the margins have witnessed some pressure mainly due to its higher ad spends, better cost control and lower tax rates has restricted the fall. Strong brand equity, large distribution network, strong balance sheet and huge sector potential make Colgate a safe bet.

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