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| Colgate: Little to smile about |
| Shobhana Subramanian / Mumbai Sep 17, 2009, 00:03 IST |
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The growth in volume could taper off in the second half of the current financial year.
 The Colgate stock has outperformed both the markets by a handsome margin over the past year. However, the company’s effective tax rate is expected to rise by 7-8 per cent to 25 per cent in 2010-11 from around 16 per cent currently since no capital expenditure is being planned in tax-free areas.
At the same time, competitors such as Hindustan Unilever are using price cuts to push volumes — prices are down by as much as 25 per cent for some SKUs and grammages have been increased for others (keeping the price unchanged). This means more competition for Colgate, which now commands a market share of just under 51 per cent.
Also, a high base in the second half of 2008-09 could slow the top-line growth in the second half of 2009-10. While there has been no impact yet of a less-than-normal monsoon, rural sales account for approximately 35 per cent of the total sales and that could be hit with a lag. As a result, analysts say earnings in 2010-11 may increase only slightly, pulling down the compounded earnings growth between March 2010 and 2012 to just around 9 per cent. In the June 2009 quarter, revenues for the toothpaste maker grew 15 per cent, driven by higher volumes of 14 per cent in both urban and rural markets.
Last year too, the growth was driven by volumes, with realisations up just about 2 per cent. To be able to sustain operating profit margins at around 22 per cent, it may need to increase prices by 2-3 per cent as some key inputs are expected to become more expensive.
In the June 2009 quarter, gross margins were down 80 basis points year-on-year. With penetration in the country at around 60 per cent, Colgate can continue to tap the growing demand as consumers upgrade from toothpowder to toothpaste.
The firm’s success in the rural markets has been driven by launch of smaller packs; it now offers a Rs 10 pack in addition to a Rs 5 pack. Over the past five years, the stock has traded at an average price multiple of 20 times; at the current price of Rs 617, it trades at 23 times 2010-11 earnings.
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