Colgate: Flat numbers

Colgate-Palmolive's March quarter results were disappointing, what with operating profit declining by 8.4 per cent. In the nine months till December, operating profit has risen 25 per cent.

Even after adjusting for the extraordinary VRS expense of Rs 1.1 crore last quarter, operating profit was down six per cent.

In the first nine months, Colgate's operating margin had jumped by 310 basis points (390 basis points if one were to adjust for the VRS expense) thanks to savings on raw material consumption and advertising expenses.

In the March quarter, both of these expenses rose as a percentage of sales, leading to a 240 basis points drop in operating margin. The revenue growth of 3.9 per cent last quarter was better than the 2.3 per cent growth recorded in the rest of the year.

For the whole year, revenues grew just 2.7 per cent, despite a 14 per cent volume growth in Colgate's key toothpaste business. One of the main reasons for this was the fact that volume growth was led by Colgate Cibaca, the offering in the economy segment.

The market share of this brand has nearly doubled to 9.9 per cent in the past year. Besides, the full impact of the price cuts taken in FY04 was felt only last fiscal.

Interestingly, higher sales of the economy product, price cuts and cost pressures aren't really reflected in raw material cost, which dropped by 110 basis points as a percentage of sales. Colgate seems to have done a good job of cost management.

Nevertheless, much of the improvement in operating profit (which rose 19 per cent after adjusting for the VRS expense) last fiscal was thanks to the cut in advertising cost.

Excluding ad expenses and adjusting for the VRS expense, operating profit rose just 5.8 per cent.

But things could be better this fiscal, as the company has taken a five per cent price hike in the toothpaste category recently. Besides, considerable savings are expected from the new manufacturing facility in Baddi, Himachal Pradesh.

But considering that Colgate already gets a discounting of 26 times trailing earnings, future growth prospects are more than adequately priced in.

Tata Power

Tata Power reported a 102.6 per cent growth in its profit before tax to Rs 176 crore in the March quarter, despite a 7.4 per cent drop in operating revenues.

Profit growth was aided by a 292 per cent jump in other income to Rs 192.08 crore, largely due to the profit on the sale of its investment in a subsidiary, Tata Petrodyne.

Operating profit, in fact, fell 45.14 per cent to Rs 156.86 crore in the March quarter and operating profit margin shrunk 1122 basis points to 16.3 per cent.

The company's average realisation per unit has dropped about 14.3 per cent on a y-o-y basis due to last year's MERC order, which resulted in lower tariffs for Mumbai consumers.

In addition, cost of fuel has grown 9.4 per cent on a y-o-y basis to Rs 462.04 crore, largely due to higher coal prices. Since fuel cost accounts for the largest chunk of the company's expenses, this increase had a major impact on margins.

As a percentage of sales, fuel cost jumped by 740 basis points last quarter. The company has sold its 75 MW power plant at Wadi, but this facility constitutes a small fraction of its total generation capacity.

The company's power plant at Jojobera with 120 MW capacity is expected to be fully operational by September 2005. However, analysts are not expecting a sharp improvement in the company's profitability since the prices of inputs, like coal, continue to be high.

Analysts expect earnings growth to be in single digits for the next two years, which makes the stock look expensive at about 13 times forward earnings.

However, the value of Tata Power's investments are estimated at close to Rs 130 per share, adjusting for which the current share price of Rs 385 looks reasonable.

TVS Motors: hardly a Victor

TVS Motors reported a drastic drop in performance for the quarter ended March 2005. Sales dropped marginally to Rs 718.27 crore, although they aren't really comparable since last year's results included the components division of Lakshmi Auto.

But this division didn't have a material impact on overall revenues. In any case, the number of motorcycles sold last quarter was lower by about three per cent compared to Q4FY04.

Operating profit plummeted from Rs 82.57 crore to 34.97 crore, and operating margin dropped to just 4.9 per cent from 11.4 per cent in the corresponding quarter of FY04.

The main culprit was a rise in the raw material costs: as a percentage of sales, these were up to 74 per cent compared with 58 per cent in Q4FY04.

Interestingly, the company managed a 14 per cent increase in net profit. This was mainly because of a big jump in its other income, which has shot up to Rs 52.12 crore from Rs 8.75 crore.

TVS has opted to prepay a deferred sales tax liability of Rs 69.18 crore at a discounted value. The resultant reduction in liability of Rs 36.94 crore has been included in the other income.

It has also saved on taxes providing just Rs 15.32 crore, lower by 32 per cent compare with Q4FY04.

For the whole year the numbers were slightly better, with net sales marginally higher at Rs 2875.91 crore despite volumes being lower by four per cent.

Operating profit dropped to Rs 211.57 crore, a fall of 18.4 per cent, thanks again to higher raw material cost. Even net profit was lower at Rs 137.57 crore, despite a higher other income of Rs 79.30 crore.

With competition set to increase this fiscal, things may only get tougher for TVS.

 (With contributions from Mobis Philipose, Amriteshwar Mathur and Shobhana Subramanian)