Colgate-Palmolive (India) Ltd’s stock fell 2.7% on Wednesday after its results were declared, as investors appeared unimpressed by a 17.9% year-on-year (y-o-y) increase in sales to Rs686 crore, or even a 60 basis points (bps) increase in operating profit margin. One basis point is one-hundredth of a percentage point.
What’s more, its operating profit margins have also increased by about 3 percentage points sequentially.
One fear could be that rising product prices—most consumer firms have passed on rising costs—could be affecting demand. But sales for the year grew 18%, only 6 percentage points more than volumes, which is reasonable. In fact, toothpaste volumes rose 14% in fiscal 2012, said the firm, which is good and even higher than the 13% growth seen in the previous year.
The company’s material consumption costs rose 14.8%, well under the rate that sales grew by, and even advertising costs grew just 14.3%. But salaries rose 20% while other expenditure rose 19.8%. But salaries and other expenditure grew faster than sales did. That restricted the y-o-y growth in profit margins. Colgate’s profit before tax rose 21%, and a higher tax rate lowered its net profit growth to 14.9% at Rs131 crore. This should not have surprised investors as the increase in tax was known.
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But when its share trades at 36 times its fiscal 2012 earnings per share (EPS), it may seem expensive when viewed alongside EPS growth.
Colgate’s premium is due to its strong market position in the oral care business, where it had a 54% market share (by volume) in the March quarter, two percentage points higher than the year-ago period.
The firm is widening its distribution network, conducting focused market activity to increase toothpaste usage and diversifying its product portfolio. It now has a 26.2% share (by volume) of the nascent but fast-growing mouthwash category.
A key concern analysts have is that Hindustan Unilever Ltd’s efforts to regain ground in this category and the imminent entry of Procter and Gamble Inc. (P&G) into the toothpaste market will affect Colgate. That may happen but the last time it faced a challenge in the toothpaste market, from low-cost competition, Colgate dug its feet in and came out on top. The lessons it learnt then will prove valuable in tackling competition.
In the near- to medium-term, if it can hold toothpaste volume market growth at these levels, overall performance should remain healthy.
The effect of a higher effective tax rate will diminish with time, when the low base effect wears off.
Colgate remains an expensive stock, possibly due to its sustained high volume growth in the toothpaste segment, better margins, and the multinational company tag. And, it may continue to remain expensive, unless volume growth slips or P&G makes a big entry into the toothpaste market.
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