enjoys leadership position in Oral care
segment.Toothpaste(~55%),Toothpowder(~38%) & Tooth Brush(~36%).Its parent
Colgate-Palmolive which holds 51% stake is world market leader in oral
care.The company not only provides itâs the technical know-how but also
provides able and efficient mangers to guide the company,when ever the need
|Income Statement & Cash Flows
||Sales & Profits
CAGR:Sales 11.4%, EBIT 15.85%, PAT 19.7%; 3Yr CAGR: Sales 15.5%,EBIT 11%,PAT
3%; Current Sales 17.66%, EBIT 12.8%, PAT 10.9%.The probable reasons for the
decline in recent profits are higher effective tax rate which doubled in FY11
to 28% and again increased marginally in FY12 to 32% as the major tax
incentive in Baddi plant has perished,Significant increase in freight and
distribution expense at 21% CAGR,it has gone up from 1.61% in FY03 of sales
to 3.3% in FY12 and significant increase in royalty at a CAGR of 33.5%,it has
gone up from 1.03% of sales to 5.24% over the sale period.
significant increase in taxes was due to lower deduction under income tax
regulation on profit from plant in H.P.The underlying economies of the
business have not changed much and as
the company derives synergy from its newly acquired factories and as the new
facilities become functional the picture too is expected to improve.The
company has almost consistently improved its gross margin over the years,this
can probably be attributed to the premumisation,pricing power and backward
intigration in manufacturing of Dicalcium Phosphate.
term 9.65% CAGR; Cash flow growth rate approx. half of PAT growth.
term average ~58%;has followed an uptrend;currently 66.75%
no long term debt and very little short term debt
|Plant & Machinery
term average 63.41% of Assets; currently 58.43% of Assets;~16% in CWIP
suppose to be in operating condition from 2013 beginning
significant portion of assets are to be operational in this year as the two
plants become functional.
working capital position has worsened over the years.Long term average -4.1%
and currently 14.81%
working capital condition has marginally detoriated,the company has increased
its inventory and debtors far faster than increase in sales and creditors in
the recent years.
term average 33.71% of Assets; currently 10.82% of Assets
|Addition to Networth
Yr CAGR at 5.24%; 3 Yr 15%; pace has increased in last 3 years
company has not increased its Net Worth at a very high rate over the long
haul because of its high payout ratio. This is a positive indication that the
company's underlying economies are such that it needs very little capital to
run the business and keep growing significantly.
capital has nearly doubled in last 10 years;Net Fixed assets has gone up 1.6
times in last 10 years. A significant
amount of assets are in CWIP,Which are supoosed to become functional in 2013
(Two plants in Gujrat and Sri City A.P).
most of the CAPEX already done,the company's ROIC which is already showing
signs of improvement may further improve.
|Return on Incremental Networth
10Yr incremental Return ~55.54%
taken along with growth rate in net worth implies that the company has the
ability to grow its earning power with minimal retention and the fact that
the company is generating above average incremental returns with the retained
average 76.31%, 3 Yr average 62% and currently at 60.23%
company's management has shown willing to share the profits when ever it
didn't have profitable investment opportunities.In the recent past dividend
growth has decelerated as the company has been retaining higher amounts to
fund CAPEX. The most important thing to note is the fact that it has financed
its expansions through internal funds. In the years to come the company is
expected to have high dividend pay out as most of the CAPEX is done. This
will boost the Total Return.
Yr CAGR at 21.8%,has decelerated in last 3 years with
lower PAT growth and higher retention to fund
|Total Returns growth
Yr CAGR:Market Cap 24.90%, Total Return 24.81%; Last 1 year 20%
of revenue from oral care,out of which ~85% comes from Sales of Toothpaste.
is the market leader with a market share of ~55% in Toothpaste,~38% in
Toothpowder & ~36% Tooth Brush.
has been among the most trusted brands for a long time,is price inelastic,the
product developes a habit and then becomes a necessity over time,demand
reoccurs in nearly a month (assuming 100grams pack for toothpaste &
toothpowder).In short it owns a consumers monopoly.
Oral care segment though dominated by 3-4 major players has become
increasingly competitive because of product
differentiation/premiumisation attempts by leading players. Niche sub segments have been built like herbal, gel,
threat of P&G entering with its brand Crest has been the talk of the town
of late. But looking at other markets where both the brands co-exist one can
say that Colgate has successfully managed to retain market leadership.
Moreover in a country like India it has the first movers advantage. Another significant aspect is the nature of
competition - all the leading players compete with each other on basis of
uniqueness not price. As long as the
competition is based on any other factor than price, it is beneficial for the
industry as it does not drain away profits.
breakups or Capex breakups per product segments not provided by Company;
Considered as oral care segment.However,the company has focused on its core
business of oral care and has come up with three new facility in last 10
years,has expanded exsisting capacity,has gone for backward integration, has
acquired 4 Oral care companies.
company is investing back in its core business,which forms 90% of the
revenue.The above average return ratios are an indication that the core
business is highly profitable.This coupled with underpenetration,very low per
capital usage,construction of new factories in tax hevens and strategic
location of factories give an impression that the company's capital
allocation is highly rational.
company has barely spent 18.5% of its PAT as CAPEX in the last 10 years and
if we remove the expansion and acquisition CAPEX it has spent 13%.
makes it stand out is the fact that over this period it has built 3 new
facilities and acquired 4 local companies. The maintenance figure is even
more staggering, the company barely needs Capital to run the existing
||The inventory days have gone up
significantly to 76 compared to an average of 54 and even the debtor days
have increased to 11 compared to an average of 6,debtor days remained 2 days
between FY07 and FY10.The creditor days is in line with the average,but
has declined by almost a month to 153
days from FY09 level.
|Fixed asset efficiency
||The fixed asset
turover has improved from 6.52 in FY03 to 10.57 in FY12.In the same period
capital turns has improved from 5.92 to 6.92.
||The company has
taken significant steps to improve operational efficiency,most important of
which is promptly shutting down factories that either had excess capacity or
produced products in which the company didn't see much potential.(has shut
down 4 in the last decade).
has a dicalcium phosphate manufacturing facility in Aurangabad. a key
ingredient in toothpaste, this reduces its cost of production by 20% and Long
term packaging agreement with Essel Propack Ltd near its Goa plant in 2011
and its immidiate effect is evedent in roughly 5 percentage points decline in
raw material cost.
advantage is clearly evident as in the last 10 year the Raw material price
has increased by barely 6.24%, when other operating expenses have increased
by 15.47%.The raw material cost as a percentage of sales has come down from
51% in FY03 to 33.25% in FY12.This serves as necessary if not sufficient
proof of the raw material competitive advantage.
|Key Risks / Monitorables
Competition Intensity; RM prices
competition from HUL, Dabur, GSK and expected entry of P&G'S Crest. Rise
in Sorbitol price.
existing competitors especially HUL succeeded in garnering significant
portion of Colgate's market share in the beginning of the decade through
product differentiation. The company realized this and introduced
differentiated products and has gained a portion of its lost market share.
Meanwhile, Dabur, Vicco etc. have been successful in making niche segments.
The entry of P&G is a potential risk, which most probably will cause
short term blips. The price volatility of Sorbitol which is another major raw
material for toothpaste is a key risk too.