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Colgate-Palmolive (India) Equity Research

HomeCompanyColgate-Palmolive (India) Equity Research

Date of Research – 12 January 2016

Price – Rs. 907.00

About the Company

Colgate-Palmolive (India) Ltd (“Colgate” or the “Company”) was incorporated in the year 1937. Colgate Palmolive Company incorporated in the United States of America is the ultimate holding company of Colgate-Palmolive (India) Ltd. Colgate is engaged in the personal care business, which includes oral care. The oral care products manufactured by the Company include toothpastes, toothbrushes, toothpowder, whitening products and mouthwash.

In addition, Colgate manufactures a range of personal and home care products including body-wash, liquid hand-wash, hair care and skin care products, shaving cream and dish washing paste under the ‘Palmolive’ brand name. In professional health care, Colgate provides oral health products for dental professionals and their patients. Today, Colgate is one of the most widely distributed brands, with a presence in 4.85 million retail outlets out of a total of 5.72 million in India. The Company has invested in setting up 2 new manufacturing facilities in Sanand, Gujarat for toothpaste and Sricity in Andhra Pradesh for toothbrush which is expected to commence production in 2014.

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 3,163.81 3,578.81 3,981.94 4,162.29  4,520.20 
Expenses 2,507.00 2,914.80 3,159.70 3,231.00  3,575.34  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 656.81 664.01 822.24 931.29  944.86  
Depreciation 43.70 50.75 75.02 111.41  133.24  
Finance Costs 0.00 0.00 –  – 
Other income 49.92 50.32 33.17 39.61  39.81  
Exceptional Items 31.34 – 
PBT 663.03 727.96 780.39 828.15  851.43  
Tax 166.28 188.09 221.41 251.64  274.00  
PAT (before Minority Interest and share of Associates) 496.75 539.87 558.98 576.51  577.43  

Profitability Analysis

Standalone (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 20.76 18.55 20.65 22.37  20.90 
Net Profit Margin Ratio 15.70 15.09 14.04 13.85  12.77 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 13.60 13.60 13.60 13.60 27.20
Reserves & Surplus 421.79 475.99 586.28 756.72 992.27
Net worth (shareholders funds) 435.39 489.59 599.88 770.32 1,019.47
Minority Interest
Long term borrowings 0.00
Current liabilities 663.39 781.44 863.27 866.59 836.54
Other long term liabilities and provisions 30.82 35.74 25.61 62.40 65.94
Deferred tax liabilities 2.59 21.72
Total Liabilities 1,129.60 1,306.78 1,488.75 1,701.90 1,943.67

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 323.81 382.62 697.41 922.76 1,086.51
Noncurrent Investments 47.12 37.13 37.13 30.13 30.13
Current assets 723.68 793.04 671.80 689.72 774.32
Long term advances and other noncurrent assets 22.90 71.54 64.62 59.28 52.70
Deferred Tax Assets 12.10 22.44 17.78
Total assets 1,129.60 1,306.78 1,488.75 1,701.90 1,943.67

Efficiency Analysis

  (%)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
ROCE 132.87 134.15 110.69 106.74 91.35
ROE / RONW 102.54 101.46 90.00 72.57 56.55

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 3,163.81 3,578.81 3,981.94 4,162.29  4,520.20 
Growth (%) 17.47 % 13.12 % 11.26 % 4.53 %  8.60 % 
PAT (Rs. Cr.) 496.75 539.87 558.98 576.51  577.43  
Growth (%) 11.26 % 8.68 % 3.54 % 3.14 %  0.16 % 
Earnings Per Share – Basic (Rs. ) 16.42 18.27 19.85 21.20 21.23   
Earning Per Share – Diluted (Rs. ) 18.27 19.85 20.55 21.20 21.23 
Price to Earnings 34.12 33.65 50.50 39.04  47.53 

Dividend History

The Company has maintained an average dividend yield of 2.01 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Colgate’s average current ratio over the last 5 financial years has been 1.08 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Colgate’s average long term debt to equity ratio over the last 5 financial years has been 0.00 times which indicates that the Company operates with close to zero debt and is placed well to withstand economic slowdowns.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Colgate’s average interest coverage ratio over the last 5 financial years has been 270.04 times which indicates that the Company can meet its debt obligations without any difficulty.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Colgate reported a promoter holding of 51.00 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.

At the same time, institutional holding in the Company stood at 23.58 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

One Response to “Colgate-Palmolive (India) Equity Research”

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