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Colgate: Strong profitable growth continues - Views on News from Equitymaster

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Colgate: Strong profitable growth continues
Nov 17, 2014

Colgate-Palmolive (India) Limited has announced its second quarter results for financial year 2014-15 (2QFY15) results. The company has reported a 11% YoY increase in sales and 18% YoY increase in net profits. Here is our analysis of the results.

Performance summary
  • Topline grew by 11% YoY in 2QFY15 on 7% volume growth in toothpastes. For 1HFY15, the revenues increased by 11% YoY.
  • Operating margin expanded by 2.4% YoY in 2QFY15 aided by lower input costs and ad-spends (both as a proportion of sales). The operating margin for 1HFY15 increased by 1.7% YoY.
  • However at the net level, the margin expansion was limited to 0.8% due to steep rise in depreciation and fall in other income. For 1HFY15, the net margin expanded by 0.8% YoY, excluding extraordinary gain in the year-ago period.

Standalone financial snapshot
(Rs m) 2QFY14 2QFY15 change 1HFY14 1HFY15 change
Total Revenue 9,007 10,005 11.1% 17,604 19,574 11.2%
Expenditure 7,544 8,140 7.9% 14,488 15,773 8.9%
Operating profit (EBDITA) 1,463 1,865 27.4% 3,116 3,802 22.0%
EBDITA margin (%) 16.2% 18.6% 2.4% 17.7% 19.4% 1.7%
Other income 130  99 -23.8% 301 164 -45.7%
Interest - -   - -  
Depreciation 117 177 52.1% 234 343 46.5%
Profit before tax 1,477 1,787 21.0% 3,184 3,623 13.8%
Extraordinary item - -   706    
Tax 382 491 28.7% 943 978 3.7%
Profit after tax/(loss) 1,095 1,296 18.3% 2,947 2,645 -10.3%
Net profit margin (%) 12.2% 13.0% 0.8% 16.7% 13.5% -3.2%
No. of shares (m)         136  
Diluted earnings per share (Rs)*       37.5  
Price to earnings ratio (x)*         53.1  
* Trailing 12-month earnings

What has driven performance in 2QFY15?
  • Colgate posted a 11% YoY revenue growth led by 7% YoY volume growth in toothpastes. The company continued to strengthen its leadership position in the toothpastes, growing its volume market share by 80 basis points YoY to 56.7% for the period January-September 2014. In the toothbrush category, its volume market share rose by 110 basis points YoY to 42.6% during the period January-September 2014.

    As a % of net sales 2QFY14 2QFY15 Change in basis points
    Cost of goods 40.20% 37.28% -292.43
    Staff costs 5.9% 6.8% 87.03
    Advertisement 20.5% 20.1% -41.49
    Other expenditure 17.1% 17.2% 7.34

  • Operating profitability improved substantially in 2QFY15 on the back of controlled rise in raw material costs and other expenses. As a proportion of sales, the cost of goods sold was down by 2.9% YoY and ad-spends were lower by 0.41%. The savings were partially offset by a 0.87% rise in staff costs-to-sales ratio. The operating margin expanded by 2.4% during the quarter.

  • The net margin expanded by a mere 0.8% during the quarter due to a 52% jump in depreciation outgo. Even the other income earned during the quarter was lower by 24%. The tax incidence has risen to 27% in 2QFY15 from 26% in 2QFY14.
What to expect?
Colgate’s market share in oral care products has remained unaffected by the entry of Procter & Gamble. In fact the company has further fortified its leadership positions in toothpaste and toothbrush despite a slowdown in discretionary spending. In the 1HFY15, the company has successfully launched a number of innovative products in toothpaste and toothbrush which have been instrumental in creating new categories and further strengthening its brand position.

At a price of Rs 1,991, the stock is trading at 35 times its FY17 earnings. We had given a BUY at lower level on this stock. At current valuations, the stock is overvalued and we would recommend that subscribers do not buy the stock at current high levels but wait for the price to correct to more benign levels.

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