• JUNE 20, 2002

Colgate turnaround: Early days…

Though Indian oral care major, Colgate Palmolive India, has logged in a 12% net profit growth in FY02, the company's topline has shown over 1% decline in topline YoY. Infact, the company's topline has dipped by 9% YoY in 4QFY02 and bottomline growth stands at 12% during the quarter.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Net Sales (incl. Excise duty)2,9332,663-9.2%11,76911,609-1.4%
Other Income1051093.8%24030928.8%
Operating Profit (EBDIT)30835515.3%9681,06510.0%
Operating Profit Margin (%)10.5%13.3% 8.2%9.2% 
Interest 31-66.7%36100.0%
Profit before Tax3403677.9%1,0031,14714.4%
Extraordinary income130-550-
Profit after Tax19321611.9%62569811.7%
Net profit margin (%)6.6%8.1% 5.3%6.0% 
Effective tax rate (%)47.1%41.1% 43.2%39.1% 
No. of Shares (eoy) (m)136.0136.0 136.0136.0 
Diluted earnings per share*5.76.4 4.65.1 
P/E ratio 22.2  27.5 
(* annualised)      

The dip in the company's topline indicates a tough market environment. Colgate has managed to grow its bottomline by controlling its raw material expenses. Its raw material costs stood pruned by 7% in FY02. Though advertisement costs in 4QFY02 have declined, for the whole year, ad expenses have actually gone up by 8%. Its ad expenses to sales crept up to 19.9% in FY02 (18.2% in FY01). Raw material cost control was largely responsible for the improvement in operating profit and consequently, the bottomline.

In FY01, Colgate earned Rs 55 m from the sale of assets, which is reflected as an extraordinary income. On the other hand, Colgate also earned Rs 68 m in FY02 as dividends from its Nepal subsidiary, which is part of that year's other income component. After excluding both, net profit actually stood at 11% YoY.

Cost Break-Up
(Rs m)4QFY014QFY02ChangeFY01FY02Change
Raw material/packaging cost1,6061,303-18.9%6,4436,002-6.8%
Staff cost1411442.1%53960311.9%

A big positive for the company is that its strong marketing and sales support initiatives are showing results. Colgate's value market share of toothpastes has improved from 46.5% in Dec 2001 to 49.6% in April 2002. However, the market itself doesn't seem to be growing.

Colgate's market cap declined dramatically over the last few years owing to HLL gnawing its market share. With Colgate showing signs of reversing that trend it should ideally see an improvement in market cap. However, it is still early days yet. As per reports, HLL seems to have lost share owing to the discontinuation of its herbal variant 'Aim'. Also, Colgate has to find ways to increase the size of the oral care market, which stands at Rs 21 bn.

At Rs 141 the stock trades at a P/E of 28x and market cap to sales of 1.8x FY02 earnings. In the long term, we believe that Colgate will continue its domination of the Indian oral care market. However, its early days yet to say that Colgate is on the turnaround path for good.

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