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Colgate: Taxes weigh on bottomline
Oct 29, 2010

Colgate-Palmolive (India) Limited has announced its 2QFY11 results. The company has reported a 13.2% YoY and 11.8% YoY gain in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Sales for Colgate grew by 13.2% YoY during the quarter.
  • Operating (EBITDA) margins for the quarter grew by 0.8% to stand at 22.8% on the back of fall in raw material costs and lower advertisement expenses. However, higher staff costs and other expenditure capped operating margin expansion.
  • Net profit increased by 11.8% YoY during the quarter. This increase has been aided by higher operating income. However, a sharp increase in depreciation and increase in effective tax rate capped net profit growth.

Standalone financial snapshot
(Rs m) 2QFY10 2QFY11 change 1HFY10 1HFY11 change
Net sales         5,029         5,693 13.2%         9,883       11,190 13.2%
Expenditure         3,922         4,396 12.1%         7,551         8,294 9.8%
Operating profit (EBDITA)         1,106         1,297 17.2%         2,332         2,896 24.2%
EBDITA margin (%) 22.0% 22.8%   23.6% 25.9%  
Other income     66     81 23.1%  152  135 -11.0%
Interest       1       6 369.2%       6     10 63.8%
Depreciation     58     84 45.8%  114  163 43.5%
Profit before tax         1,113         1,288 15.7%         2,364         2,858 20.9%
Extraordinary item       -         -           -         -    
Tax  216  285 31.6%  439  635 44.6%
Profit after tax/(loss)  897         1,003 11.8%         1,925         2,223 15.5%
Net profit margin (%) 17.8% 17.6%   19.5% 19.9%  
No. of shares (m)  136  136    136  136  
Diluted earnings per share (Rs)*         33.3  
Price to earnings ratio (x)*         26.3  
* Trailing 12-month earnings

What has driven performance in 2QFY11?
  • During the quarter, the company witnessed a volume growth of 13% YoY coming on the back of strong sales of 12% YoY in the toothpaste category. The category increased its volume market share to 53.3% from 52% during the previous quarter. Contribution from flagship brands like Colgate Dental Cream, Active Salt, Max Fresh and Cibaca contributed to the increase in market share. New products like Colgate Sensitive also contributed to market share growth. Toothbrush category also saw strong sales with a volume growth of over 24%, with increase in market share from 38.9% in 2QFY10 to 40.5% in the current quarter. However, toothpowder continued to lag category growth, losing market share. Market share of toothpowder fell marginally to 48%. New category of mouthwash grew sharply. Market share of Plax mouthwash increased from 6.4% at the end of September 2009 to 16.3% at the end of September 2010. Low penetration level, strong investments into its brands and focus on its core business has continued to benefit Colgate and this is clearly visible from the strong volume growth and increase in market share in toothpaste and toothbrush category.

    Cost break-up
    As a % of net sales 2QFY10 2QFY11 1HFY10 1HFY11
    Cost of material 41.3% 38.7% 41.7% 37.2%
    Staff costs 7.4% 9.4% 7.7% 8.7%
    Advertisement 16.4% 13.9% 14.2% 13.3%
    Other expenditure 12.9% 15.3% 12.7% 14.9%

  • Operating income grew by 17.2% YoY during the quarter. The main reason was fall in raw material costs and lower advertisement expenses. Raw material costs were lower as a result of the company’s cost saving drive. Advertisement expense fell in the absence of no new launches this quarter. However, higher staff costs and other expenditure increased capping operating income growth.

  • Bottom line grew by 11.8% YoY during the quarter aided by strong operating income growth. However, growth in net profit was capped on account of higher effective tax rate as the company exhausted some of its tax saving benefits.

What to expect?
At a price of Rs 875, the stock is trading at 23 times our estimated FY13 earnings (RPro subscribers can click here). Colgate’s investment in brand building and its costs saving drive is paying off as seen from a strong volume growth and operating income growing faster than sales. We believe that the company with its dominant position in Indian oral care markets is well poised to capture industry growth. However, with new entrants on the horizon, competition is set to intensify and this may affect the company margins going forward. For these reasons we believe that growth from a 2 - 3 year horizon is already priced in the stock.

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