Colgate: Brand power

With business brisk in both urban and rural markets, toothpaste maker Colgate has turned in a fairly strong 15 per cent revenue growth for the June 2009 quarter. Its revenue of Rs 470 crore has been driven by better volumes, which grew 14 per cent year-on-year. In the March 2009 quarter, volumes had increased by over 15 per cent year-on-year.

Given that penetration in the country is just around 60 per cent, the company is well-positioned to cash in on the growing demand with its Colgate and Cibaca brands, the latter now accounting for an estimated 16-17 per cent of sales. Consumers are upgrading from toothpowder to toothpaste. To tap this segment, the company is introducing stock-keeping units at attractive price points.

Despite the strong top line growth in the June quarter, Rs 1,695 crore gross margins for the quarter were actually down 80 basis points year-on-year with prices of key ingredients still high compared with last year. However, gross margins improved by 20 basis points sequentially. Also, the operating profit margins of 22.5 per cent — up 630 basis points — were driven by lower ad spends (down 450 basis points) and savings on overheads of close to 300 basis points.

While media costs have fallen due to the downturn in the economy and a good deal of fragmentation, the company has launched fewer products. However, ad spends are likely to increase later in the year, though prices of some raw materials could come off. Colgate is the undisputed market leader with a share of over 52 per cent and the company’s revenues are expected to grow around 14-15 per cent over the next couple of years, with operating margins sustaining at around 20 per cent.

While profits are tipped to grow a strong 28-29 per cent this year, at te current price of Rs 644, the stock trades at over 23 times estimated 2009-10 earnings and seems to be fully valued.