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Business News/ Money / Lower ad spending boosts Colgate Palmolive profit
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Lower ad spending boosts Colgate Palmolive profit

Lower ad spending boosts Colgate Palmolive profit

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The growth in net sales is slightly lower than the 16.4% year-on-year (y-o-y) notched up during the March quarter, but the net profit growth is higher than the March quarter’s 38.6%. Volume growth was the main driver of revenue, rising by 12% y-o-y.

The trend of lower advertising expenditure was seen even in the March quarter, with a 4% decline y-o-y. In the June quarter, the decline has been a huge 16%. As a percentage of sales, advertising expenses fell from 17% of sales in the June 2008 quarter to a mere 12.5% of sales in the June 2009 quarter. The upshot is that operating margins have widened considerably by 557 basis points to 22.5%. One basis point is one-hundredth of a percentage point.

But the lower advertising expenditure doesn’t seem to have affected sales growth. The company’s share in the toothpaste market has increased to 52.3% by volume. Analysts say that a less intense competitive scenario has helped reduce advertising spending.

The company’s extremely high return on equity, free cash flow and negative working capital and its position as a defensive stock par excellence has led to high valuations, with its current price of Rs644 at between 23 and 26 times fiscal year 2010 earnings, according to various earnings estimates. The stock has easily outperformed the Bombay Stock Exchange’s FMCG Index this year and should continue to do so, given its low dependence on the progress of the monsoon and the fact that 65% of its sales are urban. The stock’s valuation, though, caps its upside.

Write to us at marktomarket@livemint.com

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Published: 19 Jul 2009, 10:22 PM IST
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