Colgate-Palmolive: VRS blues

The closure of its Sewri facility has dented Colgate's second-quarter performance

In the September 2006 quarter, Colgate-Palmolive has reported another quarter of strong sales growth, but its quarterly results were adversely affected due to VRS payments.

As a result, the company's operating profit plummeted 94.8 cent y-o-y to Rs 2 crore in the September 2006 quarter compared with 15.1 per cent growth in net sales to Rs 320.01 crore.

However, if the VRS expenditure incurred for the staff at its manufacturing facilities at Sewri in Mumbai is excluded, the company's operating profit grew an impressive 57.9 per cent y-o-y to Rs 60.8 crore.

Its operating profit margin (excluding VRS payments) also jumped a huge 520 basis points y-o-y to 19 per cent in the last quarter. In the June 2006 quarter too, the company's operating profit margin improved by 105 basis points y-o-y to 12.95 per cent.

Meanwhile, the company's toothpaste volumes grew 10 per cent y-o-y in the last quarter, thanks to improved offtake for its recent launches such as Colgate Advanced Whitening. The company had hiked prices for its toothpaste portfolio by 4.4 per cent in June 2006, in order to offset rising costs.

Also, its toothbrush volumes surged 26 per cent y-o-y in the last quarter. The company's overall sales volumes had grown 11 per cent in the June 2006 quarter.

Despite strong growth in the core oral health business in the last quarter, the stock has substantially under-performed over the past three months - it has remained more or less flat compared with 15 per cent gain in the Sensex.

Also, a surprise reduction in its advertising and sales promotion budget in the last quarter, helped to minimise the rise in other expenditure.

Going forward, analysts expect a reduction in the company's operational costs, given the high-cost nature of its Sewri operations, as its new manufacturing plant at Baddi in Himachal Pradesh is understood to have stabilised.

However, with the stock trading at 27 times estimated FY07 earnings and 22 times FY08 earnings, Colgate is expensive.

SCI: Freight boost

Shipping Corporation of India (SCI) was able to only partially leverage improved freight rates in the September 2006 quarter, as operational costs went up.

Its operating profit (excluding sale of ships and other income) has risen 37.4 per cent y-o-y to Rs 294.7 crore, which was broadly in tune with improvement in net sales to Rs 1,014.28 crore. Its operating profit margin was also steady at 29 per cent in the last quarter.

In contrast, GE Shipping's operating profit margin grew by 200 basis points y-o-y to 50.4 per cent in the last quarter.

Like other players, SCI was also able to leverage better freight rates in the key tanker segment in Q2 FY07. For instance, the average spot VLCC rate (ships used to transport crude oil from West Asia to refiners in the West) was $57,332 per day in Q2 FY07 compared with $51,200 per day a year earlier.

In addition, dry bulk freight rates were stronger on a y-o-y basis in the last quarter.

However, SCI's operational costs also grew, for instance, its bunker costs rose 63.7 per cent y-o-y to Rs 167.69 crore in the last quarter. Going forward, a key concern is the sharp dip in spot freight rates in the key tanker segment, due to surging global capacity coupled with a mild winter in the northern hemisphere.

Spot VLCC freight rates are currently at $27,500 per day compared with $94,000 a year ago. No doubt the company has long term contracts in place, but they could come under pressure when they come up for renewal, given the weakness in spot rates.

The SCI stock is an under-performer over the last six months, it has gained 31 per cent against the Sensex rising 48 per cent. As a result of the decline in freight rates, the stock gets a discounting of merely five times estimated FY07 earnings.