Colgate’s cash flow falls on lower profitability, high working capital, tax outflow

Colgate’s cash flow falls on lower profitability, high working capital, tax outflow

Colgate-Palmolive (India) Ltd’s net cash generated from operations fell during 2010-11. Its annual report shows that the oral care company’s operating profit before working capital changes rose by only 7% to 522 crore.

Also, working capital needs rose during the year. The increase in inventories and debtors was not fully offset by the increase in creditors.

As a result, cash generated from operations rose by a relatively low 3.4%. Direct tax payments rose sharply on account of one of its manufacturing plants exiting from a 100% tax holiday into a lower exemption bracket.

Also See Tax Hurdle (PDF)

Net cash flow from operations fell by 3%. The extent of the fall is relatively low and should not be a cause for concern.

Also, Colgate’s capital investments are relatively low; in fiscal 2011, purchases of fixed assets amounted to just 41 crore, compared with 36 crore in the previous year.

The company has built adequate manufacturing capacity, with a capacity utilization of just 62% in fiscal 2011. Lower funding needs led to Colgate’s cash and investments rising by 18%, despite the fall in net cash from operations.

Colgate’s growth in India has been fast-paced in recent years, as the parent has stepped up its focus on growing in emerging markets. In fiscal 2011, Colgate’s toothpaste volume growth as per AC Nielsen retail market data was around 13%.

The firm’s annual report shows that, in unit terms, its sales of toothpaste and personal care products rose by 8%. The difference between retail volume growth and company-level unit sales growth may be explained by the sales of larger packs.

Another possibility could be a lower number of stock keeping units (SKUs). Internationally, one of Colgate’s aims has been to lower the number of SKUs to become more efficient. In this category, the per unit realization rose by just 5% due to competitive pressures.

Toothbrush sales are outpacing toothpaste sales. Colgate’s toothbrush and shaving brush sales rose by 22% in volume terms. But value growth was only 12.5%. Its per unit realization dipped by 7.5%, either due to a higher proportion of mass market products or discounts.

In toothbrushes, Colgate’s market share in volume terms had slipped by 60 basis points during fiscal 2011 to 40.3%, despite high volume growth, indicating competitive pressures. One basis point is one-hundredth of a percentage point.

India’s per head annual consumption of toothpaste is 118g, compared with 244g for South Africa and 255g for China. That offers scope for continued volume growth, assuming the current trend of rising toothpaste penetration and usage continues.

The main thorn in Colgate’s path is rising raw material costs, which were up by 17% in fiscal 2011, compared with a 13% growth in sales. A more moderate growth in input costs during fiscal 2012 could see its margins, profits and cash flows become healthier.

Graphic by Yogesh Kumar/Mint

We welcome your comments at