Colgate Palmolive: Hold

Recommendation: Hold

Aarati Krishnan

AFTER a promising 1999-2000 performance, Colgate Palmolive (India)'s financial performance for 2000-01 first half showed signs of slowdown; the quarter-ended September 30, 2000 reinforces this.

The company's sales for the period rose 10 per cent to Rs 304 crore, bettering the 2 per cent growth recorded in the first quarter. With arch-rival, Hindustan Lever, reporting a 2 per cent sales growth in oral-care products in this quarter, this appears a reasonable performance.

However, the growth in sustainable net profits for the latest quarter was disappointing. The reported net profits of Rs 17.60 crore for the quarter (Rs 13.30 crore in Q3 1999-2000) include a one-time income of Rs 4.20 crore from sale of property. If this is netted out, the profits are more or less flat. The profit growth in the first quarter was 11 per cent. This appears to have been impacted by higher input costs and a stepped-up advertising expenditure.

In 2000-01 first quarter, Colgate Palmolive raised the sale prices on its established brands in an effort to pass on part of the impact from the doubling of excise duty on toothpastes to the 2000 Budget. However, the low-priced packs, targeted at the mass market, were left unchanged, probably in view of the slow growth in the market for oral-care products. In both cases, Colgate had, probably, to absorb part of the increase in input costs, impacting operating profit margins in the first half of the year.

Profit growth was slowed down also by the 20 per cent increase in the adspend to Rs 56.1 crore this quarter. However, the enhanced adspend may pay-off over the medium term by way of enhanced revenues and market shares. Colgate has been quite active when it comes to product launches in recent times, having unveiled Cibaca Top and Colgate Herbal, and Colgate Navigator Toothbrush over the past few months. The new products from the parent's portfolio have been quickly transferred to the Indian company, which is a positive factor.

With dominant market shares in the oral-care segment and a ready access to its parent's product portfolio, Colgate India remains a good long-term investment prospect. The company has a substantial rural market presence and many of its recent product successes have also been in the mass market. This being the case, the company's performance in the near-term could be impacted by the slowdown in the rural economy, from the poor farm performance this year.

The scope for a near-term improvement in the stock valuation, therefore, appears limited. Shareholders can hold their investments in the light of the potential benefits from recent product launches. The stock trades at a price-earnings multiple of around 38 times the annualised earnings for 2000-01.