Colgate Palmolive

PRIMARILYa one-brand company, Colgate Palmolive India (CPI) has managed to hold its guard over the years against intense competition from big players such as Hindustan Unilever and Dabur and other regional players. New product variants, aggressive marketing and hikes in product prices helped the company to maintain its growth momentum. Unlike other defensive stocks, Colgate has not only held its own, but also appreciated by over 4% in the past one year.
Business:

Incorporated in 1937, CPI’s flagship products like Colgate toothpaste and tooth powder have secured a place in most Indian households. The company has a range of products including toothpastes, toothpowder and toothbrushes under the ‘Colgate’ brand, besides specialised dental therapies under the Colgate Oral Pharmaceuticals banner.

The company has diversified into a range of personal care products under the ‘Palmolive’ brand name, but the oral care business continues to account for over 90% of its turnover. CPI commands leadership in the toothpaste, tooth powder and toothbrush markets, with a share of 48.4%, 44.3% and 35% respectively in the urban areas for calendar year 2007. The company has designed its product portfolio in such a manner that the products are available at different price points and cater to the requirements of consumers across all segments.

While there is intense competition from low-priced brands in the oral care business, Colgate Cibaca continues to be the undisputed leader.

Growth Strategy:

launch new products in an attempt to achieve a growth in profits. The company has developed a product portfolio spanning oral care, skin care and personal care segments and has undertaken strategic initiatives focused on consumers, dental professionals and retail customers. It conducts a variety of consumption-building activities like dental education programmes, making itself visible at dental conventions, observing the oral health month with dental professionals and having a professional sampling programme.

With urban India having a per capita dental care product consumption of 92 grams per month against China’s 219 grams, the Indian market offers a huge opportunity for an increase in the consumption of oral care products. The company also sees an immense opportunity to boost the per capita consumption by increasing the frequency of teeth brushing.

Financials:

CPI’s net sales rose at a compounded annual growth rate (CAGR) of 9.2% over the past five years to Rs 1473.8 crore in FY08. During the same period, the net profits grew at a CAGR of 22.5% to Rs 235.7 crore. The dividend payouts have grown at a much higher CAGR of 25%. The company, on an average, pays out around 90% of its net profits in the form of dividends. It has a strong balance sheet befitting a FMCG company, with zero debt and healthy cash flows. Realising that it was over capitalised, CPI reduced its capital from Rs 136 crore to Rs 13.6 crore in FY08. This made its equity and net worth ratios even more attractive. The company has been on an aggressive growth path since the past two years and this is reflected by its improved financials over the past two fiscals.

Valuations:

The company is likely to close this fiscal with sales of Rs 1663 crore and net profit of Rs 283 crore. This will lead to a PE of 21.4. Assuming that the company’s sales revenues grew by 14% in 2009, as was the case in the past, one can expect profits of Rs 322 crore. This will further bring down the PE to 18.8. At a dividend yield of 3, investors looking at steady returns can consider this stock with long-term perspective.