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Sunday, Jun 23, 2002

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Colgate Palmolive: Pare exposure

Aarati Krishnan

COLGATE-PALMOLIVE India's performance for the fourth quarter of 2001-02 clearly reflects that a revival in the demand for FMCG products is still some way off, despite a good monsoon in 2001 and incipient signs of industrial recovery. The company's sales performance for the quarter ending March 31, 2002, shows a sharp deterioration over the first nine months. Sales for the quarter shrank 9 per cent, after a marginal 1 per cent increase in the first nine months.

Colgate explains that the fourth quarter of the year was impacted by streamlining of distributor inventories after substantial promotional activity in the first part of the year. This is indeed quite plausible, given that Colgate appears to have significantly scaled down both inventories and adspend in the fourth quarter.

This may suggest that the poor performance in the fourth quarter is an aberration. But given the continuing shrinkage in the market for oral care products, Colgate may find topline growth hard to come by for the next few months. The toothpaste market — the key revenue driver for Colgate — is estimated to have shrunk by 7-9 per cent in value over 2001.

There is a possibility that another good monsoon and a revival in industrial growth would add pep to the demand for FMCG products. However, even if this happens, it may be some time before the after-effects of the intense promotional activity in the market for the last two years wear off. However, one factor in favour of Colgate is that it has held its ground amidst the promotional free-for-all. Between March 2001 and April 2002, the company's market share in toothpastes inched from 48.6 per cent to 49.6 per cent. Though the company lost substantial market share in the second half of 2001, it recouped the lost ground in the March 2002 quarter. Similarly, the company also made headway in the high-margin toothbrush business, gaining some market share. Robust growth rates in Colgate's low-priced brands — Colgate Herbal and Cibaca Top — have helped the company regain market share, even as its established brands, Colgate Dental Cream and Gel, registered negative volume growth.

While the picture on the sales front is far from inspiring, Colgate's profit performance, both for the quarter and the year, has been impressive. For the quarter ended March 2002, Colgate managed a 11.9 per cent growth in its reported net profits to Rs 21.60 crore. For the year, despite a 1 per cent shrinkage in sales, Colgate's net profits rose 11.6 per cent.

However, profit growth, both for the fourth quarter and the year, is understated due to a couple of factors. Not only was the previous year's profit figure inflated by income from sale of real estate, Colgate has taken an additional depreciation charge of Rs 5.70 crore in the fourth quarter and the year 2001-02, after a change in the estimated life of furniture and equipment.

Netting out the impact of these two items, Colgate's net profits would have grown 32 per cent for the full year 2001-02 and by over 80 per cent for the fourth quarter.

Colgate's net profits for 2001-02 have benefited from a Rs 6.80-crore dividend from its Nepal subsidiary. But given that this is also of an operational and sustainable nature, it should probably be included for an evaluation of Colgate's profit performance. Colgate's margins may reap further benefits.

However, the company's prospects continue to hinge on a revival in the offtake for oral care products and it will be quite difficult to sustain the current pace of profit growth amidst a sluggish business environment. Despite efforts to broadbase its product basket, personal products contributed just 7 per cent of the company's overall revenues in 2001-02. In fact, Colgate's heavy dependence on the oral care market could continue to hold sway over the valuation for the stock.

The Colgate India stock, which has been stuck in a narrow band for some time now, has shown some signs of improvement after its 2001-02 performance announcement. At Rs 140, the stock trades at a price earnings multiple of around 27 times its latest earnings. Investors can use any uptrend in stock price arising from its good profit performance to trim exposures to the stock.

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