Colgate-Palmolive (India) Ltd.

Financial Statement Analysis Submission under the guidance of

Prof. Vinay NangiaDoMS, IIT Roorkee

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Submitted by:

Anish Tulshyan 12810009Anuja Srivastava

12810014Manish Rajwar 12810050Nishita Singh 12810058Sharad Srivastava

Table of Contents

1. Purpose of the Study...............................................................................................................3

2. FMCG Industry Overview......................................................................................................4

3. Introduction of the Company.................................................................................................7

3.1 Business Performance........................................................................................................9

3.2 SWOT Analysis...............................................................................................................11

4. CapitaI History of the Company..........................................................................................12

4.1 Reduction of Share Capital..............................................................................................12

5. Sources of Funds..................................................................................................................14

6. Applications of Funds..........................................................................................................17

6.1 Direct Expenses................................................................................................................17

6.2 Employee Benefits...........................................................................................................18

6.3 Dividends.........................................................................................................................18

6.4 External Investment.........................................................................................................19

6.5 Investment in Fixed Assets..............................................................................................20

6.6 Other Expenses................................................................................................................21

7. Advertising and Promotion Expenses..................................................................................22

8. Financial Performance..........................................................................................................24

9. Operational Performance......................................................................................................26

10. Conclusion...........................................................................................................................28

11. References............................................................................................................................29

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1. Purpose of the Study

Financial Statements are always an important source of information to evaluate a company’s position and operations. The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. The users include managers, investors and shareholders, financial institutions, employees and other stakeholders. Today it has been made mandatory for a company to disclose their financial statements (balance sheet, statement of profit and loss and cash flows) under the Indian Companies Act 1956. This has led to increased transparency and also induced standardization to compare one organization with others. Financial statement analysis is therefore an important way to check the overall financial health of a company in a given environment and competition. The major objective of the financial statement analysis is:

Assessment of past performance Evaluate competitive position Analyze operational efficiency Predict future outlook and growth

As a part of our “Financial Statement Analysis and Reporting” course we are analyzing financial statements of a company in a chosen industry and present the findings. Our role in analysis is like the third party who would make a comment on the overall financial standing and performance of the organization, not to recommend about buy/sell of stock or investigate about correctness/appropriateness of the information given in the financial statements. We are also not interested in suggesting how a company’s position can be strengthened but only to study & predict on the basis of the current situation. For this purpose we have chosen FMCG industry and Personal Care as sub-sector. For analysis, we have chosen Colgate-Pamolive (India) Ltd. we have mainly relied on the annual reports of the company for our study with some additional sources (whenever necessary) such as online sources, professional databases like Bloomberg and reports published by consulting firms.

We have done past five data analysis of the company primarily on the basis of annual reports of the company. Since the financial statement’s template got changed a few years ago, we have also converted different formats into one for better presentation and study. The performance of the company is also evaluated against peers and also the industry as a whole to check if the company is doing good or there are improvements required. Our analysis includes overall business performance of the company, major sources and applications of funds, investments made by company, capital history, operational efficiency of the company, growth story and other associated aspects. On the basis of these parameters, a conclusion is drawn on the overall outlook of the company.

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2. FMCG Industry Overview

Fast-Moving Consumer Goods (FMCG) or Consumer Packaged Goods (CPG) are products that are sold quickly and at relatively low cost. Examples include non-durable goods such as soft drinks, toiletries, and grocery items. Though the profit margin made on FMCG products is relatively small, more so for retailers than the producers/suppliers, they are generally sold in large quantities. FMCG is probably the most classic case of low margin/high volume business. The top 5 FMCG companies by net sales are Nestle S.A., The Procter and Gamble Company, Unilever Group, Pepsico Inc and Kraft Foods Inc. The figure below show the major categories into which the FMCG industry can be divided. Colgate Palmolive India Ltd competes within the Fast Moving Consumer Goods (FMCG)/ Consumer Packaged Goods (CPG) sector focusing on the subset of Oral – Care products.

Figure: Overview of FMCG Industry

The Indian FMCG sector is the fourth largest sector in the economy with an estimated size of Rs.1.3 trillion. The sector has shown an average annual growth of about 11% per annum over the last decade. Unlike the developed markets, which are prominently dominated by a few large players, India’s FMCG market is highly fragmented and a considerable part of the market comprises of unorganized players selling Unbranded and unpackaged products. There are approximately 12-13 million retail stores in India, out of which 9 million are FMCG Kirana stores.

Penetration level and per capita consumption in many product categories is very low compared to world average standards representing the unexploited market potential. Mushrooming Indian population, particularly the middle class and the rural segments, presents the huge untapped opportunity to FMCG players. Growth is also likely to come from consumer 'upgrading' in the matured product categories like processed and packaged food, mouth wash etc. A distinct feature of the FMCG industry is the presence of international players through their subsidiaries (HLL, P&G, Nestle), which ensures innovative product launches in the market from their parent's portfolio. The figure below shows the spending pattern of an average Indian. Colgate Palmolive serves the oral care market which is a subset of the personal care spending shown below.

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India has 17% of the world's population and that half of these people are under the age of 25. With a median age of 25 years, increasing numbers are joining the Indian workforce. India's share in world consumer spending is set to enlarge from 1.9% in 2005 to 3.1% in 2020. Income in the hands of younger consumers with a higher propensity to spend, is providing optimism for the economy while opening up new categories in the FMCG space. India is under changing phase as more women are joining India's workforce, FMCG players are finding opportunities to introduce products in the convenience and health food segments. While spending on women's personal care products is also becoming far more acceptable. Distribution of smaller pack sizes, innovations like single use sachets to reach out to the rural and lower section of the economy is gaining demand. Innovative products to cater to regional or local tastes and the needs of niche consumers is also benefiting in the growth of the industry.

The FMCG Sector is facing a temporary setback in the current year. Global unit sales have dipped slightly owing to laggard performance by grocery and drug channel. Even in India, the growth has been slower in the three of the past four quarters, owing to economic slowdown and high inflation. Increased cost of raw materials has forced companies to increase selective prices, which has caused a further setback. Also, a trend of downgrading to private labels has been observed in discretionary items. However, companies have once again posted robust growth in the most recent quarter (Q2, FY14). In the long term, the FMCG sector has a great opportunity for growth in the country, with the growing population, the rising disposable incomes, education, urbanization, the advent of modern retail, and a consumption-driven society. There is a potential for all the FMCG companies as the per capita consumption of almost all products in the country is very low compared to world standards, there exists huge untapped opportunities.

Oral Care Sector

The global oral hygiene market was worth $25.4 billion in 2008. It increased at a rate of 3.3% compounded annual growth rate (CAGR) to reach $30.9 billion in 2012. It is forecasted to grow at nearly the same rate of 3.2% CAGR to reach $36.1 billion by the end of 2017 with most of the growth coming from developing markets in Asia and Africa. In unit terms, the oral hygiene market grew from 12.7 billion units in 2008 to 15.4 billion units in 2012. Toothpaste sales dominated the global oral hygiene market, generating 57% of the market's overall revenues. Geographically, Europe accounts for 37.5% of the global oral hygiene market value. Colgate-Palmolive Company was the winner in this category accounting for 21.3% share of the global oral hygiene market value. Supermarkets and hypermarkets distribute 43% of the global oral hygiene market value.

India has very low penetration in the Oral hygiene category. The figure below shows the per capita consumption of toothpaste in India along with those in a few other countries. The lower use-level in a developed economy like Britain is due to increased use of other oral care products like mouthwash and dental floss. The very low level in India can be attributed to the use of twigs by a large part of the population. Brushing teeth twice is also not very popular. Low penetration will present an opportunity for a high growth in the future.

Figure: Per Capita Consumption foe various countries 5 | P a g e

Source: Colgate-Palmolive India Ltd. website

The oral care market in India can be segmented into toothpaste - 60 percent; toothpowder - 23 percent and toothbrushes - 17 percent. This segment is dominated by Colgate-Palmolive with a market share of about 49 percent, while HUL occupies second position with a market share of nearly 30%. In toothpowder market, Colgate and Dabur are the major players.  

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3. Introduction of the Company

Colgate-Palmolive India Ltd (CPIL) is a 51% owned subsidiary of Colgate-Palmolive Company (CPC), USA. CPC’s main business is manufacturing and marketing of oral care products, toilet soap, and shaving products. From a modest start in 1937, when handcarts were used to distribute Colgate Dental Cream Toothpaste, Colgate-Palmolive (India) today has one of the widest distribution networks in India. The Company has grown to a Rs.2805 crore plus organization with an outstanding record of enhancing value for its strong shareholder base. The company leads the Rs.5050 crore Indian toothpaste market by holding 54.2% of the value market share. As on Mar 31, 2013, total employee strength of the company was 2008.

Since 1976, Colgate has worked in close partnership with the Indian Dental Association (IDA) to spread the message of oral hygiene to children across the country under its ‘Bright Smiles, Bright Futures’ Schools Dental Education Program. This program has successfully reached more than 105 million school children covering around 2,41,699 schools across the country since its launch. The program focuses on children so that the message of good oral hygiene is carried home to families and the community at large. In 2004, as an additional effort to create awareness for good oral hygiene ‘Oral Health Month’ (OHM), was introduced. Since its launch, OHM is conducted each year during September/October, where the free dental check ups are conducted by Colgate in partnership with IDA across the country.

Colgate, the market leader in Oral Care, has for the past 75 years been constantly innovating to drive growth by offering technologically advanced Oral Care solutions. Responding to changing consumer preferences and needs is the bedrock of our approach to innovation. By listening to our consumers, we understand their needs, their usage habits and their attitudes. It is this deep understanding that drives Colgate to develop transformational solutions in oral care. The products of the company can be categorized into four segments – Oral care, Personal Care, Household Care and Dentist Area.

Oral Care Personal Care Household Care From the DentistsToothpastes

ToothbrushesToothpowder

Whitening ProductMouthwash

Body WashLiquid Hand Wash

Shave prepsSkin CareHair Care

Surface Care Gingivitis TreatmentSensitivity Treatment

Tooth WhiteningFluoride Therapy

Mouth Ulcer TreatmentSpecialty Cleaning

Source: Colgate-Palmolive India Ltd. website

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Today, for millions of Indians, toothpaste means Colgate. Colgate is one of the widely distributed brands, with a presence in 4.85 million retail outlets (out of total 5.72 million retail outlets in the country) in 2012. It has strengthened its leadership position in the toothpaste category to 54.6% from 52.9% in the previous year. Similarly, market share in the toothbrush category was strengthened to 40.5% and market share in the mouthwash category has been growing consistently.

Colgate – the Most Trusted Brand once again in 2012

‘Colgate’ has been ranked as “Most Trusted Brand” by Brand Equity’s Annual Survey. In the year 2011 as well, Colgate was voted as #1 Most Trusted Brand of the year. Colgate had also been rated as India’s number one Most Trusted Brand across all categories for four consecutive years from 2003 to 2007. It is the only Brand to be ranked in the top 3 from the inception of the survey in 2001. It was also ranked as the 3rd most admired Company in India by the Global Business Magazine Fortune and Management Consultancy Hay Group.

In the year 2004, Colgate with the assistance of Colgate-Palmolive Company (CP-USA) set up a Global Shared Services Organization (GSSO Division) to provide IT/ITES services and assistance to some of the subsidiaries of CP-USA including Colgate India. Its services primarily revolve around, but are not limited to, the operations, maintenance and enhancement of the SAP ERP system as well as electronic communication systems, administrative, financial, managerial and technical matters in the IT/ITES segment. Recently, CP-USA announced a four year Global Growth Efficiency Program (GG&EP) for sustained growth. The program’s initiatives are expected to ensure continued growth and enhance the Colgate group’s global leadership positions in its core businesses. The said program is expected to achieve the objectives through:

1. Expansion of commercial hubs2. Extension of Colgate Business Service Centers (CBS) and streamlining of global functions; and3. Optimization of the Global Supply Chain and Facilities.

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Innovation

In India today, consumer needs are fast evolving. Colgate has been staying ahead of trends by identifying opportunities based on insights into consumer behavior and leveraging technology to deliver innovative products. Its success in delivering meaningful innovation is evident in several of our recent innovations. One out of three Indians suffer from gum problems. To address this issue, the company launched Colgate Total Pro Gum Health, a technology breakthrough which reverses gum problems in four weeks. It has also launched Colgate Visible White toothpaste to create the beauty segment through this one-of-its kind Oral Care solution that offers one shade whiter teeth in just one week. In the toothbrushes segment, it launched 3600, a battery operated toothbrush for consumers seeking superior teeth cleaning and MaxFresh toothbrush for those seeking freshness. In the mouthwash category, it launched Colgate Plax Fresh Tea, a new flavor that builds on the green tea trend.

Other key information is mentioned as:Registered Office: Colgate Research Centre, Mumbai, IndiaChairman: M. V. DeorasManaging Director: Prabha ParameswaranAuthorized Capital: Rs. 13700.00 LakhPaid-Up Caiptal: Rs. 1359.93 LakhTurvover: Rs. 332420.91 LakhBusiness Segment: Personal Care

3.1 Business Performance

Colgate has over the years have shown excellent growth. It has an uninterrupted track record of paying dividend and has delivered compounded annual Return since the Initial Public Offer in 1978.

Table: Growth story of Colgate over the yearsParticulars FY2009 FY2010 FY2011 FY2012 FY2013

Sales Increase from last year (%) 15.1 15.8 13.2 18.1 17.5PBT Increase from last years (%) 18.1 40.6 7.2 13.1 12.8PAT Increase from last year (%) 25.3 45.9 -4.7 10.7 11.4Source: Colgate Palmolive Annual Reports

Colgate has been able to maintain and increase its performance consistently over the years. It witnesses a short period in net profit decline due to increased competition and recession however it has regained its ground in the very next year. The sales have been increasing at the rate of 15.93% over the last five years whereas the gross profit is increasing at the CAGR 16.87%. Net profit too has been growing at CAGR 16.46% for last five years. The robust growth has been possible through the company’s continuously expanding brand building investments. All these details indicate that company has a strong fundamentals and stable over the years. The financial highlights are mentioned below:

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Cash and Bank Balance: The proportion of cash and bank balances has increased by 71% in 2013 as compared to 2009. Possible reasons can be:

Colgate sold some of its investment in 2009 and parked them as cash to withstand the uncertainty in the capital market during those times because of the 2008 market crash.

Colgate had sold its Nepal subsidiary in 2009 resulting in an increase in cash and bank balances. During the last 5 years, Colgate has earned huge profits which contributed in growing balance. Maintaining high amount of cash and bank balances by Colgate may be due to some strategic

decisions or to cushion itself from some unforeseen circumstances arising due to market phenomenon or it can also be used as a signalling weapon against its competitors.

Debt: Strategically Colgate keep themselves debt free. Possible reasons could be they want to have strong fundamentals in the eyes of investors. Recently they are establishing two facilities for business expansion. However they did not take any loan as they have adequate funds.

Account Receivables: The account receivables of Colgate has always been lower, less than 2% of its total assets which indicates that firm does not avail much credit to its wholesalers and distributors. This is may be due to its monopoly created by more than 50% market share and high brand loyalty among its customers.

Account payables: It can be observed that Colgate maintained a consistent high level its funding using sundry creditors. This again shows that they are using their market power arising from the market share with the suppliers also. There is one more question that why Colgate delay its payment, many times more than 6 months in spite of having huge cash and bank balances and also when they can avail discount by paying cash instantly. This can be attributed to the fact that most of its input raw materials that are chemicals are linked to the global oil prices. As we know there are huge volatility in the crude oil prices, suppliers would be hesitant for any future commitments of bulk order. Hence it’s the obvious choice for big players like Colgate to delay their payables to the maximum limit.

Cost of Goods Sold: It has come down from 42% in 2009 to steadily around 30 % in 2013 of sales. These years have seen higher inflation and rise in cost of raw materials. Still COGS has come down which can be attributed to the fact that there was a continuous rise in product prices at a rate higher than its cost of raw materials.

Asset Unitilisation: During the period, Colgate gross sales increased by a higher (83%) rate compared to its asset base which increased by 68%. This indicates that company was able to rotate capital at a faster rate than earlier or we can say company was able to increase its asset utilization.

Operating Efficiency: Colgate was able to keep control on COGS and operating expenses in spite of higher rate of inflation of around 9% in last five years. In the same time period net sales of the company increased by 81% .This shows that company achieves higher operating efficiency levels.

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Strength

Parent support: Colgate Palmolive India Limited has a strong support from its parent company, which is a world leader in oral care company, with a presence in almost every country. The company has access to the parent’s hugely successful global folio of products and brands.

Market Leader in some of the Key Products: Colgate Palmolive India Limited is a market leader in the oral care market having an existence of more than 70 years. The company commands a market share of more than 50% in the oral care market.

Backward Integration: Colgate Palmolive India Ltd. has entered into backward integration also. The company has set up a world-class facility for manufacture of Di-calcium Phosphate, a key ingredient in toothpaste. The manufacturing facility has yielded significant cost savings for the company and also acts as a cushion for the company against the price rise in raw material prices.

Wide market coverage: The company has one of the widest market coverage in urban as well as in rural market. For future growth, the company needs to focus more towards rural area.

Weakness

Concentration risk over single category: The company has a high reliance on a single category, Oral Care, which accounts for more than 90% of the company revenue and profit. The other two categories, Personal care and household care, contribute less than 10% of the company revenue.

Opportunity

Low Penetration Level: There is lower penetration level of oral care in rural market. Most of the users in rural market use traditional products like neem twigs, salt or other herbal ingredients. Hence there is still lots of untapped potential in rural market

Tax Benefits: The company has reported a decrease in tax portion, which is mainly due a facility in the tax free zone of Baddi. This plant enjoys excise and income-tax exemption.

Threats

Compete in Low end segment: The company has few competitors in the premium segment, but many regional players apart from some big players in low segment products. The competition in lower segment is high.

4. CapitaI History of the Company

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Colgate shares capital history is really interesting. From the year 1978 when it first went public, it has delivered a compounded return of around 27%. The company is owned 51% by Colgate Palmolive USA and rest includes others. A brief account of equity capital history is mentioned below:

Table: Share Capital History of Colgate-Palmolive India Ltd.Year Issue No. of Shares (In

Millions)Cumulative Number of

Shares (In Millions)1978 IPO 2.0 2.01982 Bonus 1:1 2.0 3.91985 Bonus 1:1 3.9 7.91987 Bonus 1:1 7.9 15.71989 Bonus 1:1 15.7 31.41991 Bonus 3:5 18.9 50.31993 Preferential issue to Colgate-Palmolive

(USA) Company11.3 61.6

1994 Bonus 1:1 61.6 123.21994 Rights 1:10 12.3 135.51994 Preferential issue to Employees and

Colgate-Palmolive (USA) Company0.5 136

Source: Colgate-Palmolive India Ltd. website

As one can see that the company is very rewarding for equity holders and large number of shares are awarded since the first issue. It is also reflected from that fact that the Earning per Share (EPS) has been growing at 19% CAGR for last 10 years. Dividend per Share (DPS) too is showing an impressive growth of 21% CAGR for last 10 years. The company has never delayed its dividend commitments. The company is earning profits years after year and has an adequate surplus fund to cater to its requirements. It has almost zero debt to equity ratio which indicates very low risk attached. The company has not issued any shares of any kind thereafter and total number of shares remained at 13.6 crores. However in 2007, the value of total share capital decreased to 10% because of reducing the face value, detailed later. Major shareholders include Colgate-Palmolive USA which has steadily owned 51% of the shares in last 5 years.

4.1 Reduction of Share Capital

In the year 2007 the company took a landmark decision for reducing the face value of shares of Rs. 10 to Rs. 1. At this time, the total authorized capital as per Memorandum of Association was Rs. 137 crore and Colgate was very close to the limit. In such situation it could go for further issuance. Additionally, getting the limit increased is a painful task and involves several legal and administrative challenges as well as the chances of success are slim. Hence there was an urgent need to address this issue. The objective of such a decision was as mentioned below:

Reduce the Share Capital which is in excess of the operational needs of the Company i.e. the Company is over capitalized.

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Enhance Shareholder value and improve the Return on Equity by using the excess cash.

The advantages were optimum leveraging of the company, better utilisation of excess cash, enhance shareholder value and returns. The proposal on reduction of share capital, as passed by the shareholders at the Annual General Meeting held on July 27, 2007, was confirmed by the Hon’ble Bombay High Court vide its order dated September 27, 2007. Accordingly, the reduction of share capital became finally effective November 1, 2007. Consequently, the existing issued, subscribed and paid-up equity share capital of the Company stood reduced from Rs. 136 crore comprising of 13,59,92,817 equity shares of the face value of Rs. 10/- each fully paid-up to Rs.13.60 crore comprising of the same number of equity shares of the face value of Re. 1/- each fully paid-up. The move was not to split the share but merely changing the face value of Rs. 10 to Rs. 1. The total number of shares ot the shareholding pattern was unaltered. Therefore the parent company Colgate-Palmolive USA would continue to hold 51% shares. The decision was positively received by the stock market and share prices rose by 12.5% a day after the board meeting when the scheme was announced. The price of the shares increased from Rs. 352 per share to Rs. 396 per share.

Figure: Shareholding pattern of Colgate-Palmolive India Ltd. over the years

Source: Colgate-Palmolive Annual Reports

The parent company’s share percentage is fixed at 51% whereas the share of others are decreasing by each year. The others include NRIs/OCBs, Domestic Companies, Banks and Mutual Funds and Financial Institutions. As one can see, the share of FIIs is increasing slowly throughout the period. Since FIIs carries a perceived level of expertise in evaluating and analyzing a company, it can be inferred that the company is doing well and its reputation is growing along with its performance.

5. Sources of Funds

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The major sources of income come from the sale of finished goods which constitute over 85% of the net sales. Other sources are income from services, stock in trade and non-operating income (such as interest earned cash discounts etc.). For operating income too, income from sales of finished goods mainly includes soaps, cosmetics and toilet preparations whereas for stock in trade, toothpaste and toothbrush are the major items. Let’s have a look at net revenue (operations) growth over the years.

Figure: Net sales over the years

As we can see that net sales (gross sales less excise duty) has been increasing at a healthy annual rate of 16%. This reflects the robustness of the business model adopted by the company. The company also has some additional sources of generating income like income from services, which also makes it a part of operating revenues. For the last five years, services income contributed around 2-3% of gross revenues from operations. In addition to these operating revenue sources, the company also has non-operating income like interest received on bank deposits, cash discount received, exchange gains, profits on sale of fixed assets and so on. However the share of this type of income is very less and contributes only around 0-3% of total revenues. Father the share of such income has been decreasing over the last 5 years which can be partially attributed to the economic recession. In the non-operating revenues, there is an element of miscellaneous income. The nature of such income is not known however this type of income is very less (lesser than even 0.25% of total revenues) which could be overlooked for analysis purposes. The income are displayed in the table below.Table: Revenue Sources for last 5 years (In Rs. Millions)

Source of Revenue FY2009 FY2010 FY2011 FY2012 FY2013

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Operating Revenue 17473.08 20172.91 22861.16 26932.27 31638.05Non-Operating revenue 552.62 436.26 412.43 506.85 499.23

Total 18025.70 20609.17 23273.59 27439.12 32173.28Source: Colgate-Palmolive India Ltd. Annual Report

As a result the company is earning profits as also increasing its investment, explained in later sections. The company continued to lay emphasis on cash generation driven by strong business performance, focus on efficiencies, cost management and continued efficient collection system. It achieved its goals by focusing on strategic initiatives which are: engaging to build own brands, innovation for growth, being effective and efficient and leading to win.

The company also displayed an impressive performance as compared to competitors. It has shown a superior growth rate with respect to peers. The main competitors are Hindustan Unilever Ltd. and Dabur India Ltd. occupying second and third position. A comparative chart of their growth in net sales over the years is shown here. As we see that Colgate has been steady over the years and its sustained marketing efforts has started giving results. The company is also successful in terms of withstanding the test of economic recession. The peers, on the other hand have witnessed huge losses in financially turbulent times. There is intense competition in this sector and recently HUL has lost share to Dabur India as well as Colgate Palmolive. In terms of growth, Dabur is emerging as a potential threat (though it is currently at 3rd rank in terms of market share), especially for herbal toothpaste category.

Table: Comparative Growth in Net Sales over the years (In %age)

Source: Annual Reports of the companiesThe company has not issued any shares or taken any debt for the several years. Is has not taken any long term debt for the last couple of years. Before than that also, it has taken very little debt of long term. It is

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natural as the company is a cash rich one and does not require any funding for its purposes. This again reinforces the fact that Colgate-Palmolive carries very little risk to the investors. The company has instead generated profits which keep adding to the reserves and surplus amount. Hence from an investor’s standpoint it offers a rare combination of little risk coupled with high returns. In addition to this, the company has also invested in fixed asset and paying dividends as discussed later.

6. Applications of Funds

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The application of the funds is the major consideration area for any company. As for Colgate it is fast becoming an issue as the rate of increase of expenses are more than of income. If we consider the horizontal analysis, the sales income has increased by 16.4% CAGR during last five years whereas the cost of material consumed (direct cost) has grown by 25.8% CAGR in the same period. Even if we consider the total cost, it has increased by 17.7%. There are several reasons that can be attributed to this anomaly. While the cost of raw material as well as wages has gone up, the pieces were not escalated in the same proportion due to competitive pressures. Additionally the company is investing in its marketing and brand building activities which acts as an overhead cost. I spite of this, the company has been able to stay ahead of the competition and generate enough revenue to create profits. Let’s have a look at some major areas where the funds are consumed.

6.1 Direct Expenses

Direct expenses are any types of expenses that are specifically related to the creation of a product or service. The expenses of this type may include the raw materials used in the manufacturing process, as well as labor costs associated with employees who manage the actual production. The classification of indirect and direct expenses is very important to the function of a business enterprise, not only in terms of managing operational costs but in some cases also in the calculation of taxes. Since this type of expense is directly related to the volume of the good produced, it is marginal is nature which means the increase in this expense will be static for every additional unit of product. As this expense grows varies with the volume, the expense is variable in nature. Accounting for direct expenses is a key element within any business. Failing to accurately keep track of the cost of raw materials, labor costs, and other expenses directly involved in the manufacturing effort can make it difficult to set unit prices for the products produced that are sufficient to cover those expenses. When this happens, the business may generate a great deal of sales, but ultimately not take in enough per unit to sustain the operation over the long-term. For simplicity, we have taken the cost of material consumed and purchase of stock in trade expenses as major expenses of the company.

Figure: Direct Expenses over last five years

For FY2009 to FY2013, cost of material consumed has increased 2.5 times (from Rs. 396 crore to Rs. 992 crore) at 25.81% annual rate. The prices of raw materials such as chemicals, tubes etc. has increased

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however intense competition has restricted the company to increase the prices. On the other hand the purchase of stock in trade has seen the decline rate of 9.35%. The reason for decreasing expense for purchasing stock in trade is that the company is moving away from this type of business. This segment mainly deals with toothpaste and toothbrush items.

6.2 Employee Benefits

The expenses of the employee are considered as an indirect cost as the expense is not related to the amount of goods produced. This expense covers broadly four headers:

Salaries, Wages and Bonus (more than 80% of total employee expenses) Contribution to Provident Fund, Gratuity and Other Funds (5-10% of total employee expense) Voluntary Retirement Cost (0-3% of the total employee expenses) Staff Welfare Expenses (3-5% of total employee expense)

Table: Employee Expenses Breakup in Rs. Lakh (% of Total Employee Expense)Particulars FY2008 FY2009 FY2010 FY2011 FY2012 FY2013

Salaries, Wages ad Bonus 9946.85(84.1)

11959.04(83.4)

14448.61(90.8)

17219.18(89.1)

19043.67(88.3)

21803.39(87.4)

Contribution to Provident Fund, Gratuity and Other Funds

1193.35(10.1)

1373.76(9.6)

792.63(5.0)

1442.32(7.5)

1846.97(8.6)

2175.09(8.7)

Staff Welfare Expenses 587.52(5.0)

521.64(3.6)

666.11(4.2)

660.83(3.4)

670.13(3.1)

965.32(3.9)

Voluntary Retirement Schemes Cost

99.96(0.8)

486.21(3.4)

- - - -

Total Employee Expense 11827.68 14340.65 15907.35 19322.33 21560.77 24943.80

The various expenses for past years are given along with their weights. As we can see that around 5/6 of the total expense goes into paying salaries and wages. Statutory requirements such as PF and Gratuatity also share the remaining expenses. On the other hand only 3-4% if total expenses are spent on welfare activities which indicates towards insufficient on skill development and training programs. All other are regular expenses for running the business and add no value addition.

6.3 Dividends

A significant portion of net profit is spent on paying dividends. Hence the dividend per share is very high as compared to earnings per share. The figure for EPS and DPS of Colgate-Palmolive as well as DPS of peer companies are presented here. As we can see that there are constant increase in the dividend per share for Colgate even if the company’s profit were decreased i.e. low EPS is observed. This tells us the value given by the company on shareholder value. In other terms, the earnings per share is increasing at the rate 14.38% for showing the period whereas the dividend per share is growing at the rate of 16.89%. This is very high when a peer comparison is done. In the same period dividend of one share has grown by 25.32% for HUL and in case of Dabur, it has remained almost static. Even for HUL, the rise

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has not been smooth and there were lots of ups ad downs. In year 2010 lesser dividend was distributed by HUL which reflects the impact of the economy on this particular company and its vulnerability. Hence one can infer that Colgate-Palmolive is more rewarding in terms of returns and there are less risks (fluctuations) associated.

Figure: Dividend Comparison with Competitors (Also includes Colgate EPS)

As one can see that the earnings per share decreased (low profit) in the financial year 2010-2011 which indicated the impact of global economic recession and consequently conservative spending by the consumer. This puts a negative pressure on prices and the profit margins were reduced. The company quickly recovered from the situation and exhibiting good performances since then.

6.4 External Investment

Since the company is earning handsome profits and has adequate cash, it has deployed the funds into investment activities. The investment again is of two types long term and short term. Investments that are readily realizable and are intended to be held for not more than one year from the date, on which such investments are made, are classified as current (short term) investments. All other investments are classified as non-current (long-term) investments. The company long term as well as short term investments is in bonds of different companies (mainly government owned). If a long term investment is redeemable in a particular year, it is mentioned as short term fro that financial period. The company has invested in the bonds of Indian Railway Finance Corporation, Power Finance Corporation Limited and Housing and Urban Development Corporation Limited (HUDCO). Below chart shows the amount of investment at the end of last five financial year.

Figure: Total Investment over the last five years

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Source: Colgate-Palmolive India Ltd. Annual Reports

As we see that the total investment has decreased in the financial year 2010 because of economic recession. It has led to divestment activities up to some extent which the company regained in the next financial year. The company actually sold off investment in the tune of Rs.15 Crore in 2009-10 and Rs. 31 Crore in 2008-09. After that the company got out of the financial crisis and purchased investments worth rupees 19 crore and 8.5 crore in next two years.

6.5 Investment in Fixed Assets

As the company is making impressive profits year after year, it has also increased its investments in the fixed assets. The company is continually investing in its fixed asset and also replacing its old assets. It has also increased its fixed asset convertibility (explained later). Let’s have a look at the purchase and sale of fixed assets during last five years.

Table: Purchase and Sales of Fixed Assets over Last five years (Amt. in Rs. Lakh)Particulars FY2009 FY2010 FY2011 FY2012 FY2013

Purchase of Fixed Assets 243.50 3551.28 4110.53 10222.30 15471.76Sale of Fixed Assets 1107.27 449.56 21.19 59.85 257.42

Source: Colgate-Palmolive India Ltd. Annual Reports (Cash Flows)

As we see that that year 2008-09 is particularly troubling for the company. This is the only year in which company’s sales of fixed asset exceeded the purchase amount during the last five years. In the last couple of years, the company invested very heavily in the fixed assets. It is setting up a new toothpaste manufacturing facility in Sadanand in Gujarat to support the growth momentum and to cater to the increasing demand of our products. The new factory is scheduled to commence commercial production

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in 2013. The company is also in an advanced stage of obtaining various permissions for a new toothbrush manufacturing facility at Sricity in Chittoor District in Andhra Pradesh. This new toothbrush manufacturing facility is expected to commence commercial production in the year 2014.

6.6 Other Expenses

In addition to other expenses, there are some other overheads as well which incurs significant cost to the company. It includes royalty charges, advertising and sales promotion expenditures, freight charges, director’s fees and commission, repairs and maintenance, rent and miscellaneous charges. Out of them, advertising and promotional expenses are an important consideration for a FMCG company and later discussed in detail. These other charges are also significant in values. This outside expense is mentioned below in terms of miscellaneous and defined heads below.

Figure: Miscellaneous Expenses as % of Total Other Expenses

Source: Colgate-Palmolive India Ltd. Annual reports

There is some worrying trend observed in the recent couple of years. The share of miscellaneous expenses in the total expenses is on rise. Since it is not clear for which reasons or overheads these expenditures are incurred. The share has been close to 10% (except financial year 2010-11). The absolute figures are also high like approx. Rs. 93.5 Crore in 2012-13 and Rs. 76.9 Crore in 2011-12. For the total expenses also, this unexplained expenditures have been under 5% for last five years but are on increase for last two years. There is ambiguity on this part and company should disclose additional information about this kind of expenses.

7. Advertising and Promotion Expenses

In case of FMCG industries, marketing expenditures becomes paramount and directly related to the overall sales and profitability. Colgate-Palmolive India Ltd. understands the importance of building and

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sustaining brand equity and achieving competitive advantage. The company believes that through a combination of powerful marketing strategies, innovative new products and market development and expansion activities, the dentifrice market in India and the company’s business will continue to grow stronger in the next several years. The company achieved its goals by focusing on strategic initiatives which are : engaging to build own brands, innovation for growth, being effective and efficient and leading to win. The main objective of marketing and promotional activities is to create a strong brand in order to gain competitive advantage which converts into higher sales. Hence the sales and branding activities should not be seen in isolation but with respect to peers. Since the rivals operate at a different scale hence comparing marketing expenses straight away will not be of enough help. A better measure would be to evaluate and compare marketing related expenses with respect to total expenses incurred. Below table shows the marketing expense as a percentage of total expenses.

Table: Sales and Promotional Expenses Comparison (As % of Total Expenditures)Company FY2009 FY2010 FY2011 FY2012 FY2013

Colgate Palmolive India Ltd. 18.65% 19.00% 19.33% 19.12% 19.21%Hindustan Unilever Ltd. (HUL) 11.97% 15.77% 16.00% 13.83% 14.65%

Dabur India Ltd. 14.15% 16.51% 14.36% 12.50% 13.63%Source: Annual reports of the companies

We can clearly see that Colgate-Palmolive India Ltd. is giving more focus on the brand equity creation and maintenance. Though the companies like HUL spends huge amount of funds, their relative share in total expenditures is lower as compared to Colgate-Palmolive India Ltd. Further the company’s share has largely grown in the last five years whereas in case of peers, both upward as well as downward movement is observed. This also reflects the company’s intensified marketing focus and activities. The company’s expenditure has paid good results and helped it increase market share. It also earned them a significant amount of goodwill. In an inflationary environment, the company’s continuing efforts and focussed programs to enhance efficiencies and reduce costs continue to yield strong, positive results helping to maintain margin and fund investments in building and strengthening brand equity and the business. Prudent price increases and cost management have enabled the company to maintain its gross margin for the period despite considerable inflationary pressure. According to Brand Footprint, Colgate has highest penetration of 86% in FMCG sector. The company in partnership with the Indian Dental Association has started conducting annually, an intensive two month-long awareness campaign under the banner ‘Oral Health Month’. The aim of this campaign is to create oral health awareness and motivate people to adopt preventive self-care habits to improve their oral health. This was one more step in the company’s longstanding effort to spread the message of good oral health and encourage the use of modern and efficacious Oral Care products.

Figure: Effect of Marketing Expense on Market share

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The above chart establishes the success of Colgate promotional investment as their market share is increasing. It not only is the market leader in its category but a distant winner too. However the continued economic recession has led to lesser consumer spending and in that process the gross profit margin has been decreasing for last three years. Net profit margin is also displaying the same pattern. Various analysts speculate that Colgate margin will further downgrade in order to maintain its brand equity and market share.

The oral care market in India is poised to grow substantially, going forward. Penetration of toothpaste, in particular, is likely to improve, as more and more people (1) upgrade from tooth powder or local remedies to toothpaste; and (2) take to brushing twice a day, as opposed to only once-a-day brushing, which is currently the norm with most Indians. Toothpaste volumes therefore will likely keep growing. Also, as people upgrade from basic toothpaste to premium toothpastes, the value of the market will grow. Therefore, the growing toothpaste market in India may well have room for the four global players (Colgate Palmolive, Hindustan Unilever Ltd., Dabur India Ltd. and GSK Consumer Healthcare Ltd.) who may control up to 85% of the market, going forward. In contrast, local players will have to be content with the rest of the market.

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8. Financial Performance

Despite an inflationary environment and increasingly fierce competition, Colgate-Palmolive India Ltd. delivered very strong results year after year. It continued to lay emphasis on cash generation driven by strong business performance, focus on efficiencies, cost management and continued efficient collection system. The company managed investments prudently by deploying surplus funds after ensuring that such investments satisfy the company’s criteria of safety and security. This has also reflected the share prices of Colgate which is shown below:

Figure: Comparison of Colgate shares with stock index

Source: NIFTY

We can see that Colgate prices had generally shown by the upward trend steadily with very little volatility. Also we can observe that market fluctuations had negligible impact on its share prices over a period of time. We can attribute this to their large cash and bank balances which acts as a cushion in turbulent times and their large market share. The company also has been successful in generating good returns for shareholders. We normally use “Return on Net Worth” to measure the return to the share owners. It is the amount of net income returned as a percentage of shareholder’ equity. It is also known as Return on Equity.

Table: Return on Net Worth for various competitors (In %)Company FY2009 FY2010 FY2011 FY2012 FY2013

Colgate-Palmolive India Ltd. 134.2 129.8 104.8 102.5 101.5Hindustan Unilever Ltd. 103.6 88.2 74.0 77.7 94.7

Dabur India Ltd. 47.7 53.6 40.9 37.6 35.9Source: Annual Reports of the Respective Companies

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As we can see that Colgate-Palmolive India Ltd. is very rewarding to the shareholders when compared to competitors. However lately the ratio is going down indicating the less comparable net profit. This could be attributed to the global decline in the market as the phenomenon is observed in peers as well. Apart from this, there is another measure to check efficiency of overall capital employed which is known as Return on Capital Employed. This ratio is also expressed in percentage form and denotes the total returns before taxes and interests with respect to total capital employed (both shareholder’s fund and lending funds are incorporated). The comparison is mentioned below:

Table: Return on Capital Employed for various competitors (In %)Company FY2009 FY2010 FY2011 FY2012 FY2013

Colgate-Palmolive India Ltd. 156.3 146.6 135.8 135.5 135.4Hindustan Unilever Ltd. 107.5 103.8 87.5 96.8 109.1

Dabur India Ltd. 46.7 57.0 32.6 31.7 32.1Source: Annual Reports of the Respective Companies

Since Colgate has no or very little loans hence its return on total capital is higher and follows a similar pattern as of shareholder returns. The gradual decrease in the value could be attributed to the same reason. Since the Colgate has been giving good returns and handsome profits, its shares are also highly valued in the market as compared to its peers. Also since the company is doing really good, its net profit as a percentage of sales is also very good. The ratio for the players are given below:

Figure: Net profit as a % of Net Sales for various players

Source: Annual Reports of the Companies

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9. Operational Performance

Operational performance is concerned with the working capital management and liquidity management of a company. For a retail company, this is one of the ore analysis and liquidity should be high. To start with we would compare the current ratio which signifies the extent of the current assets with respect to current liabilities. We would also like to determine the relative size of liquid assets and this could be done through quick ratio. Below figure denotes the comparison of these ratios.

Figure: Current and Quick ratio of various players

Source: Moneycontrol Database

We see that current as well as quick ratio for Colgate Palmolive India Ltd. is steady over the last five years. On the other hand, ratios for HUL is declining whereas it is increasing for Dabur. Therefore Dabur is going towards low risk-low return whereas HUL is following opposite pattern. Colgate liquidity management is static over these years. For companies operating in FMCG industry, it is also interesting to be seen whether the company is able to rotate its inventory efficiently. This is done with the help of Inventory Turnover Ratio which tells us that in one year, how many times the inventory has been rotated. A higher value indicates better operations and lower waste.

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Table: Inventory Turnover Ratio for Various PlayersCompany FY2009 FY2010 FY2011 FY2012 FY2013

Colgate-Palmolive India Ltd. 22.25 20.98 18.04 15.11 16.50HUL 7.72 7.73 8.27 8.70 10.82

Dabur India Ltd. 10.47 10.28 8.68 7.68 8.56Source: Capitaline Database

Though the efficiency of Colgate is still better than its competitors however there is also an underlying cause of concern. In the last five years, the ratio for Colgate has decreased whereas it has improved for HUL. This fall of efficiency should be arrested considering the fact that HUL also is the challenger.

For a retail company, it is also important to see whether its creditor’s turnover and debtor’s turnover periods are good. A high creditor’s turnover period and low debtor’s turnover period are what a company seeks for. It shows the relative positioning of the company and brand value in the market. The days for various competitors are mentioned below:

Figure: Debtors and Creditors Turnover Period (In Days)

Source: Capitaline Database

Overall we see that Colgate has the highest creditor’s turnover period and lowest debtor’s turnover period which reinforces the brand equity held by the company. However due to fierce competition and economic recession, it has relaxed its credit policy and the period for debt collection has increased from 5 days to 9 days. Now it is almost parallel to HUL. Recently HUL has improved its collection and payment policy which in turn has eroded the advantage of Colgate-Palmolive. Dabur is still away both in terms of debtors or creditor’s turnover days. In other words, Colgate and HUL are in a neck-to neck fight with Dabur trailing them.

Overall operational performance of Colgate-Palmolive needs to be improved urgently. Currently it is having the upper hand but the gap is getting reduced very fast.

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10. Conclusion

As a whole we see that Colgate is giving excellent results in financial. It enjoys a market leadership position, constantly earning profits and have been a haven for investors. However its operations and working capital management is lacking on some issues and competitors are catching up very fast. Colgate must concentrate on eradicating these deficiencies to maintain its brand equity. It also has to revisit its inventory maintenance policy to form a formidable relationship with channel partner and lower the holding cost. If Colgate-Palmolive India Ltd. deploys the appropriate strategies to plug the holes, the future is very bright for the company.

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11. References

Reports

Annual Reports of Colagate-Palmolive India Ltd. Annual Reports of Hindustan Unilever Ltd. Annual Reports of Dabur India Ltd.

Online Resources

http://www.capitaline.com/user/framepage.asp?id=1

http://www.colgate.co.in/app/Colgate/IN/HomePage.cvsp

http://www.hul.co.in/ http://www.dabur.com/default.aspx http://www.moneycontrol.com/

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