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Colgate: Annual report extracts - Views on News from Equitymaster
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Colgate: Annual report extracts
Sep 21, 2010

Colgate Palmolive (India) Limited has a presence in India since last 50 years. The company manufactures and markets products for oral care, personal care and household care. Oral care products contributes 96.1% to total revenues while personal care contribute 2.6% and household care contribute 1.3% to sales. In its core business of toothpaste, Colgate dominates, enjoying a 51.2% market share.

Business unit revenue share

The company had a robust performance in FY10. Colgate’s sales grew by 14.9% YoY while it’s operating (EBITDA) margins increased by 5.4% to 22.2%. This came on the back of fall in raw material costs. The company’s bottomline on the other hand grew by 45.8% YoY aided by growth in operating income and fall in effective tax rates.

Market share Cost of goods sold

Sales of the company grew on the back strong rural demand aided by strong volume growth. In fact all catgories of the company baring toothpowder grew faster than category growth notching up increase in market share. While market share for toothpastes increased by 1.8% to stand at 51.2% for FY10, the market share of toothbrushes increased by 3.6% to stand at 40.4%. Market share for toothpowder fell by 2.2% to 43.2% as the company has been focusing less and less on this market in recent times.

Market share

The company during FY10 distributed most of its profits for the year with a payout ratio of 63%. Colgate continues to remain a high dividend paying company with a dividend of Rs 20 per share.

Dividend History

The company’s ROE fell marginally by 1.2% to stand at 131% for FY10. This is due to a lower leverage ratio as the networth of the company grew faster than the assets, signifying higher cash levels for the company. However, fall in leverage ratio was offset by higher profit margins. This helped maintain the ROE at FY09 levels.

Dupont break up

Current ratio for the company increased from 0.86 to 1.07 during the year. This is due to a fall in current liabilities and increase in current assets. However, gains in current assets are due to increase in cash levels for the company. When adjusted for cash, current ratio is seen to increase from 0.42 to 0.43 in FY10. It may be noted at for FY10 the cash of Colgate’s books was 39% of its total assets.

Current Ratio

Colgate invested Rs 147 m in capex over the year but the return on sales was higher than the investment in gross fixed assets. This is evident from the graph as gross assets to sales fell from 32.2% to 28.5% during the fiscal. This shows that Colgate is utilizing its fixed assets more efficiently to generate sales.

Gross assets sales

What we expect?
At a price of Rs. 857, the stock is trading at 23.3 times our FY13 earnings estimate (RPro subscribers 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. Moreover, as per the chart, Colgate is trading at its most expensive levels since November 2006 on a 1 year forward PE basis. For this reason we would advise subscribers to be cautious on the stock.

colgate-1year forward PE chart

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