Colgate: Not much reason to smile

THE COMPASS

The Colgate brand remains as strong as ever with the company gaining market share in the September 2008 quarter. The Rs 1,538 crore oral care major commands 49 per cent of the market and has seen better volumes — up 11 per cent — which resulted in sales increasing by 14 per cent to Rs 430 crore. The pace may be somewhat lower than the 16 per cent that it hit in the June quarter, but is nonetheless creditable.

In fact, the top line has grown at above 12 per cent for 13 quarters now and the trend should continue in an economy in which disposable incomes are rising and the penetration both in the toothpastes and tooth brushes segments is relatively low. It would appear that consumers are upgrading from toothpowder to toothpaste — given that volumes for toothpowder have been falling. Dabur, for instance saw its volumes fall by about 3.6 per cent y-o-y in the first six months of FY09. However, past experience shows that consumers can be quick to downtrade in difficult times.

Though the top line has grown, operating profit margins have come off by 220 basis points to 16 per cent. The culprit is higher input costs as also bigger spends on advertising -- ad spends were up 220 basis points y-o-y to 19.8 per cent. In a competitive market, the company hasn’t been able to pass on these expenses to consumers.

As such, the profit before tax rose a disappointing 2 per cent y-o-y to Rs 72 crore and it was a lower outflow on taxes that helped boost the net profit by 16 per cent. Last year Colgate saw its revenues grow nearly 19 per cent but the top line could lose momentum trending towards a growth closer to 14 per cent over the next couple of years. Net profits are expected to average a growth of about 16-17 per cent.