Colgate-Palmolive (India) Ltd’s shareholders have almost missed the recent rally in the stock market.
While the Bombay Stock Exchange (BSE)-100 has risen by 87% from its lows in March, the company’s shares have risen by just 13%. But then, Colgate’s shares aren’t known for mimicking the wild gyrations of the stock market. Instead, its investors have enjoyed steady returns with far less risk.
In the past six years, the stock has delivered a compounded annual return of about 28% (including dividend payout), compared with a return of about 32% for BSE-100. This has been possible because of a consistent financial performance and a shareholder-friendly policy of generous payouts.
The company continued its steady performance in the year ended March 2009, with sales growing by 15% and net profit rising by 25%. The company has increased its dividend payout to Rs15 per share, from Rs13 in the previous year.
What’s heartening about the company’s results is that sales growth has been primarily because of volume growth, unlike other fast-moving consumer goods (FMCG) firms, where revenue growth has been driven by price increases. In the January-March quarter, the sales growth of 16.4% was on the back of volume growth of 14.9%. What’s more, while other companies in the sector have lost share owing to downtrading by consumers, Colgate hasn’t been affected by this phenomenon of shifting to cheaper brands. The company also reported a 400 basis points jump in operating margin in the fourth quarter, which took analysts by surprise. As a result, operating profit jumped by over 40% in the fourth quarter.
The company has managed to increase its market share steadily by investing heavily in advertising and sales promotion. Besides, it has products at various price points, which insulates it to a large extent from the downtrading phenomenon. Some analysts believe that the opportunity for the company is immense, given the low penetration in the toothpaste segment. The company now has a market share of over 50% and is therefore best placed to benefit from the growth in this segment.
As pointed out earlier, the markets have already rewarded Colgate for its consistent performance—the stock now trades at over 22 times trailing earnings. Of course, if the company continues growing the way it has in the past few years, returns will continue to be high.
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