Colgate: Another quarter of steady growth

Significant savings on input costs and and ad spends fuelled margin expansion

Strong margin gains and steady volume growth enabled Colgate post in-line results for the March 2015 quarter. Net sales grew 11 per cent year-on-year to Rs 1,022 crore and was marginally below the Bloomberg consensus estimate of Rs 1,037 crore. The miss can be attributed to the slightly lower-than-expected toothpaste volume growth, say analysts, which came in at five per cent. Analysts were expecting this metric to be at the top-end of 5-7 per cent range witnessed in recent quarters.

The earnings before interest, tax, depreciation and amortisation (Ebitda) margin, though, expanded by a handsome 230 basis points year-on-year to 24.2 per cent in the quarter. Significant savings on input costs (down 361 basis points to 29.4 per cent of sales) and ad spends (down 289 basis points to 15.1 per cent) fuelled margin expansion. The margin could have been higher but for the 178 basis points surge in employees' costs to 6.5 per cent. Nevertheless, it was largely the margin gains that were responsible for the surge in net profit to Rs 164 crore.

There are, however, some items between the operating and net level that impacted profit growth. Though not significant, the other income surged 80 per cent to Rs 7.4 crore. Last year, an exceptional expense of Rs 6.15 crore suppressed its reported net profit. To that extent, it has propped up Q4 FY15 profits. These gains, however, were offset by a 188 basis points year-on-year surge in tax rate to 30 per cent. Although the net profit number was still a tad better than estimate of Rs 161 crore, post-discontinuance of some fiscal benefits, the management expects tax rate to increase to 30-31 per cent in FY16 and 33-34 per cent in FY17 versus about 28 per cent in FY15.

Analysts believe margins could improve further over the next two quarters. While major benefits of easing input costs are already reflected in the March 2015 quarter, higher growth of premium toothpaste products such as Visible White, Active Salt, amongst others could aid margins. Notably, share of premium products in overall revenues has increased from 15 per cent in FY14 to about 20 per cent in FY15, and is seen inching up further.

Importantly, Colgate has managed to strengthen its leadership position despite intensified competition from players such as P&G, HUL and others.