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Colgate: Short term hiccups - Views on News from Equitymaster
 
 
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  • Nov 22, 2000

    Colgate: Short term hiccups

    Colgate Palmolive (India) has reported a disappointing financial performance for the first half ended September 2000. Although, the company’s profits have increased by 22% quarter on quarter, topline grew by a marginal 6%. The slow growth in revenues was despite having introduced and re-launched several products during the year (‘Colgate Herbal’ toothpaste, ‘Colgate Navigator’ toothbrush).

    As can be seen from the table, the company’s financials have been impacted adversely after the year 1998. This could be partly attributed to increasing promotional expenses. Although, compounded annual growth rate of profits for the last 4 years is negative 5%, in the past three years profits have witnessed a positive CAGR of 33%.

    Financial Snapshot
    Year End March 31 1HFY98 1HFY99 1HFY00 1HFY01 4 yrs CAGR
    Net Sales 4,368 4,991 5,584 5,896 10.5%
    Other Income 127 37 93 115 -3.3%
    Total Income 4,495 5,028 5,677 6,011 10.2%
    Operating Profit 663 396 561 586 -4.0%
    Interest 1 2 - -  
    Depreciation 104 110 129 93 -3.8%
    Profit before tax 558 284 432 493 -4.0%
    Tax 196 107 178 183 -2.3%
    Profit after tax 362 177 254 310 -5.0%

    Key Ratios
    Year End March 31 1HFY98 1HFY99 1HFY00 1HFY01
    Operating profit margins 12.3% 7.2% 8.4% 8.0%
    Tax/PBT 35.2% 37.8% 41.2% 37.1%
    Net profit margins 8.0% 3.5% 4.5% 5.2%
    Cash EPS (Rs) 6.85 4.22 5.63 5.93
    EPS (Rs) 5.32 2.60 3.74 4.56

    Over the years Colgate’s operating margins have stabilized at around 8%, which is comparatively less than the margins of other FMCG companies and its historic margins. Several factors have impacted it profits margins adversely. Colgate is targeting mass markets with a smaller size packs as a result it was unable to increase the price of its products in the past few years. Also during the year it had to absorb part of the increase in input costs (due to doubling of excise duty on toothpastes).

    Profit growth was impacted in 1HFY01 due to a rise of 20% in advertisement expenses. However, the enhanced ad spend is expected to pay-off over the medium term by way of increased revenues and market share. One should not ignore the fact that Colgate enjoys a dominant share in the oral care market and has a ready access to its parent’s product portfolio. But the near term growth of the company could be impacted by the slow down in the rural economy as Colgate derives more than 70% of its revenues from rural markets

    Increasing Ad spend
    Particulars FY97 FY98 FY99 FY00 1HFY01
    Advertisement exps. 1,038 1,479 1,639 1,940 1,065
    As a % to sales 11.3% 15.3% 17.3% 18.2% 18.3%

    At the current market price of Rs 158 the stock trades at a P/E multiple of 35 times its first half 2001 annualised earnings with a market cap/sales ratio of 1.7 times. Current valuations of the company are comparatively less than its peers in the industry.

     

     

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