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Colgate: Adspends knock down profits - Views on News from Equitymaster
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Colgate: Adspends knock down profits
Nov 10, 2011

Colgate-Palmolive (India) Limited has announced its second quarter results for financial year 2011-12 (2QFY12) results. The company has reported a 19% YoY increase in sales and 0.6% YoY fall in net profits. Here is our analysis of the results.

Performance summary
  • Sales grew by 19% YoY in 2QFY12 led by 13% YoY volume growth. For 1HFY12, sales increased by 17.4% YoY.
  • Operating (EBITDA) margin for the quarter fell by 340 basis points due to steep rise in advertisement spends coupled with higher raw material and other expenditure. The operating margin for 1HFY12 contracted by 550 basis points.
  • Net profit fell marginally by 0.6% YoY during the quarter. This fall has been due to lower operating income coupled with higher interest and depreciation expenses. During 1HFY11, PAT declined by 10% YoY.

Standalone financial snapshot
(Rs m) 2QFY11 2QFY12 change 1HFY11 2HFY12 change
Total Revenue 5,693 6,755 18.7% 11,190 13,049 16.6%
Expenditure 4,396 5,448 23.9% 8,294 10,386 25.2%
Operating profit (EBDITA) 1,297 1,308 0.9% 2,896 2,664 -8.0%
EBDITA margin (%) 22.8% 19.4%   25.9% 20.4%  
Other income 81 95 16.8% 135 215 58.9%
Interest 6 8 23.0% 10 14 43.2%
Depreciation 84 106 25.8% 163 194 18.5%
Profit before tax 1,288 1,289 0.1% 2,858 2,671 -6.5%
Extraordinary item - -   - -  
Tax 285 293 2.8% 635 670 5.4%
Profit after tax/(loss) 1,003 997 -0.6% 2,223 2,001 -10.0%
Net profit margin (%) 17.6% 14.8%   19.9% 15.3%  
No. of shares (m) 136 136   136 136  
Diluted earnings per share (Rs)*         28.0  
Price to earnings ratio (x)*         37.8  
* Trailing 12-month earnings

What has driven performance in 2QFY12?
  • Colgate clocked 19% YoY sales growth in 2QFY12 led by 13% YoY growth in offtake. The oral care category registered strong sales growth of 20% YoY on the back of volume market shares of 52.6% for toothpaste and 36.3% for toothbrush. The new product launched, Colgate Sensitive Pro-Relief, also contributed to the growth. Even the emerging mouthwash category continued its growth momentum garnering volume market share of 26.4%. In mouthwash category, Colgate Plax Sensitive Mouthwash and Colgate Plax Complete Care Mouthwash were introduced in the quarter.

    Cost break-up
    As a % of net sales 2QFY11 2QFY12   1HFY11 2HFY12  
    Cost of material 38.67% 39.03% 0.4% 37.2% 39.1% 1.9%
    Staff costs 9.4% 7.7% -1.6% 8.7% 7.8% -0.9%
    Advertisement 13.9% 16.9% 3.1% 13.3% 16.3% 3.1%
    Other expenditure 15.3% 15.7% 0.4% 14.9% 15.7% 0.8%

  • The company's operating profitability has been sharply hit by a 45% YoY jump in advertisement & promotional spends. Stiff competition in this category and entry of new players led to higher spends on brand promotion during the quarter. Adspends to sales ratio shot up by 310 basis points YoY to 16.9% during the quarter. Even cost of goods sold and other expenditure posted YoY growths of 20-22% each. Only staff cost to sales ratio fell by 160 basis points YoY on wage rationalisation. Apart from this, the company incurred closure costs including voluntary retirement scheme and other related costs of Rs 82.2 m during the quarter as it closed the toothpowder production facility at Hyderabad. Excluding this one-time impact, the operating margin has slid by 220 basis points YoY.

  • The company's earnings fell marginally on a poor rise in operating income coupled with higher interest and depreciation outgo. Interest expenses and depreciation charges increased by 23% and 25.8% respectively on a YoY basis. The company's other income component grew by 16.8% YoY during the quarter.

What to expect?
At a price of Rs 1058, the stock is trading at 27 times our estimated FY14 earnings. Although the company enjoys dominant position in toothpastes, it is facing intense competition in this category as well as other niche product launches such as toothpaste for sensitive teeth and mouthwash. Therefore the step-up in advertisement & promotional spends has constricted margins since the past two quarters. At current valuations, we advise our investors to remain cautious.

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