Colgate-Palmolive (India) Ltd’s 2009-10 report shows how it outperformed the oral-care market by holding back price hikes. Its toothpaste volumes rose by 14% during fiscal 2010, following a 13% growth in the previous fiscal, when it had followed a similar strategy. Colgate’s price realizations in the soaps, cosmetics and toiletries category rose by just 1.6% while that in the toothbrushes and shaving brushes category rose by around 5%. Though Colgate does not give a separate break-up for individual categories, since oral care contributes around 90% of sales, these numbers provide a good approximation.
Despite a small increase in prices, sales growth was higher due to a volume growth of 14% in soaps, cosmetics and toiletries and 25% growth in brushes. Colgate also benefited from lower raw material costs on a per unit basis. It managed to keep other costs, such as employee and advertising costs, low. Royalty payments increased significantly, however, rising by 45% to Rs87 crore and the firm has not given any explanation as to why it has risen by nearly 1 percentage point to 4.3% of sales, compared with last year.
Also See Overflowing Coffers (Graphic)
Margins improved during the fiscal and consolidated net profit rose 52%. Cash generated from operations, however, rose by only 19% to Rs484 crore due to an increase in working capital. Even so, the sheer amount of cash being generated by its operations is creating a problem for Colgate. Its cash balance and loans, at Rs430 crore, account for nearly 70% of its assets.
This cash lowers its asset efficiency ratios, as the interest it earns is much lower compared with returns from its business operations. After rising sharply for three years till fiscal 2009, Colgate’s return on capital employed rose by just 2 percentage points in fiscal 2010 to 157%. The figure by itself is quite impressive, but if Colgate rids itself of the excess cash, it can get even better. Indian multinational firms have limited avenues of utilizing their surplus cash, as they rarely make acquisitions. The only option is to buy back shares or return cash by way of bonus debentures. If Colgate takes either of these routes, its returns could improve further.
Graphic by Yogesh Kumar/Mint
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