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Colgate: Profits fall on high other expense
Nov 1, 2013

Colgate-Palmolive (India) Limited has announced its first quarter results for financial year 2012-13 (2QFY14) results. The company has reported a 15.8% YoY increase in sales and 24.5% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Revenues grew by 13.7% led by 10% volume growth.
  • However, steep rise in ad-spends and other expenses clipped operating margin by 6%.
  • Net profits fell by 24.5% on a 16.8% drop in operating profit and 12.4% fall in other income earned.


Standalone financial snapshot
(Rs m) 2QFY13 2QFY14 change 1HFY13 1HFY14 change
Total Revenue 7,924 9,007 13.7% 15,485 17,604 13.7%
Expenditure 6,166 7,544 22.3% 12,103 14,488 19.7%
Operating profit (EBDITA) 1,758 1,463 -16.8% 3,382 3,116 -7.9%
EBDITA margin (%) 22.2% 16.2%   21.8% 17.7%  
Other income 149 130 -12.4% 261 301 15.5%
Interest -   -     -      -    
Depreciation 106 117 10.0% 211 234 10.9%
Profit before tax 1,801 1,477 -18.0% 3,432 3,184 -7.2%
Extraordinary item    -      -        -   706  
Tax 350 382 9.2% 807 943 16.8%
Profit after tax/(loss) 1,451 1,095 -24.5% 2,625 2,947 12.3%
Net profit margin (%) 18.3% 12.2%   17.0% 16.7%  
No. of shares (m)         136  
Diluted earnings per share (Rs)*           38.9  
Price to earnings ratio (x)*           31.9  
* Trailing 12-month earnings

What has driven performance in 2QFY14?
  • Colgate posted a 13.7% topline growth primarily driven by 10% volume growth. The toothpaste segment grew by 9% and strengthened its leadership position to 56% volume market share for 9mCY13 as compared to a share of 54.6% for the year-ago period. In toothbrush, the company's market share rose to 41.4% for 9mCY13 as compared to a share of 39.3% for the year-ago period.

    As a % of net sales 2QFY13 2QFY14 Change in basis points
    Cost of goods 40.9% 40.2% -66.30
    Staff costs 6.9% 5.9% -91.72
    Advertisement 11.2% 13.3% 204.24
    Other expenditure 18.9% 24.4% 547.49

  • However, the robust topline growth failed to percolate to operating profit due to steep jump of over 30% in each of the ad-spends and other expenses. The other expense-to-sales ratio surged by 5.5% whereas the ad-spends-to-sales ratio climbed higher by 2% during the quarter. Therefore savings of less than a percentage point in each of the raw material cost and staff charges (both as a proportion of sales) were simply inadequate to plug the steep jump in other operating expenses. Resultantly, the operating margin was squeezed to a mere 16.2% in 2QFY14 as compared to an operating margin of 22.2% earned in the year-ago quarter.
  • At the net level, profit slumped by 24.5% on a 16.8% fall in operating profit and a 12.4% drop in other income earned. The tax incidence rose to 26% in 2QFY14 from 19% in the year-ago quarter.

What to expect?

Colgate's profitability has been hit by higher operational expenses on rising competition. But its long term prospects remains strong on robust brand equity and vast distribution reach.

At a price of Rs 1239, the stock is trading at 27 times our estimated FY16 earnings. We had given a BUY at lower level on this stock. At current valuations, the stock does not offer a comfortable margin of safety and we re-iterate a BUY at lower level on the stock.

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