COLGATE-PALMOLIVE (PAKISTAN) LIMITED – Analysis of Financial Statements – Financial Year 2004 – 3Q – Financial Year 2011

Colgate Palmolive Pakistan initiated its operations in 1985 in Pakistan when US granted licence to manufacture and market products in Pakistan. It offers products such as oral care, surface care, fabric care and personal care.

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COMPANY SNAPSHOT
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Name of company Colgate Palmolive Pakistan Limited
Nature of Business Personal Goods
Ticker Colgate Palmol
Net Turnover 3Q’11 Rs 10,271,910,000
Net Turnover 3Q’10 Rs 8,582,515,000
Net Profit 3Q’11 Rs 842,278,000
Net Profit 3Q’10 Rs 959,229,000
Share price (avg. over Jul’09-Mar’11) Rs 559.65 per share
Market Capitalization as at Mar 31st 2011 Rs 17,679,847,190
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RECENT PERFORMANCE (3Q11)

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Rupees in 000s 3Q’10 3Q’11 % Change
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Turnover 10,848,096 13,105,376 20.81
Net turnover 8,582,515 10,271,910 19.68
Cost of sales 5,610,949 7,259,762 29.39
Gross profit 2,971,566 3,014,148 1.43
Selling and distribution costs 1,340,269 1,539,475 14.86
Administrative expenses 103,584 115,739 11.73
Profit from operations 1,469,514 1,292,009 -12.08
Finance costs 8,372 8,656 3.39
Profit before taxation 1,461,142 1,283,353 -12.17
Taxation 501,913 441,075 -12.12
Profit after taxation 959,229 842,278 -12.19
EPS 34.92 26.66 -23.65
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Gross turnover increased by 20.81% from Rs 10.85 billion in 3Q10 to Rs. 13.11 billion in 3Q11. Net turnover similarly increased by 19.68% from Rs. 8.58 billion in 3Q10 to Rs. 10.27 billion in 3Q11. However, due to high input cost of raw material and packing material, cost of sales increased by 29.39% from Rs. 5.61 billion in 3Q10 to Rs. 7.26 billion in 3Q11.

This was due to the macroeconomic condition of the country characterized by high inflation and increasing prices of crude oil, which peaked at US $107 per barrel in the last quarter. Despite high inflation, a major portion of the increased cost was not passed on the customer, due to extreme competition. This led to only 1.43% increase in gross profit from Rs. 2.97 billion in 3Q10 to Rs. 3.01 billion in 3Q11.

Selling and distribution cost increased by 14.86% due to higher marketing expenses necessitated by the competitive environment and administrative expenses increased by 11.73%. Overall, profit from operations decreased by 12.08% from Rs. 1.47 billion in 3Q10 to Rs. 1.29 billion in 3Q11. Finance cost deceased negligibly by 3.39% and taxation decreased by 12.12%, leading to a net 12.19% decrease in profit after taxation from Rs. 959 million in 3Q10 to Rs. 842 million in 3Q11. Due to the worsening bottom-line of the company, EPS also decreased by 23.65% from Rs. 34.92 per share in 3Q’10 to Rs. 26.66 per share in 3Q11.

QUARTERLY SALES AND EARNINGS COMPARISON

Quarterly sales comparison of Colgate Palmolive with the other industry players (ICI Pakistan, LOTPTA, and Clariant Pakistan) shows that LOTPTA is the industry leader with sales of Rs. 15.95 billion in the quarter ended Mar 11, with ICI achieving the next highest sales at Rs. 10.67 billion, followed by Colgate Palmolive at Rs. 3.71 billion and Clariant at Rs. 2.38 billion. Compared to the quarter ended Mar 10, LOTPTA registered the highest sales growth at 71.10%, followed by ICI’s sales growth of 31.88%, Colgate Palmolive at 26.39% and Clariant at 12.06%. This shows that Colgate Palmolive lagged behind its competitors in increasing its sales growth, pointing to a lag in advertising and selling efforts of the company.

The industry leader, LOTPTA, exhibited the highest earnings at Rs. 249 million for the quarter ended Mar 11, followed by ICI at Rs. 624 million, Colgate Palmolive at Rs. 346 million and Clariant at Rs. 224 million. In line with its highest sales growth, the earnings growth of LOTPTA was also the highest at 170.33% compared to the earnings in the quarter ended Mar 10. This was followed by ICI’s earnings growth of 57.30%, Clariant at 26.13% and Colgate Palmolive at 20.36%.

However, it must be kept in mind, that the spectacular performance of ICI and LOTPTA were driven to a large part by their polyester units. In the international market, the cotton price peaked, causing Polyester Stable Fibre (PSF) and Purified Terephthalic Acid (PTA), to become affordable substitutes to cotton, as the price differential between the two commodities crossed US $2 per kg in January 2011. In the domestic market also, shortage of cotton crop due to floods caused the cotton price to increase 86%. Thus increased polyester demand from the downstream industry enabled LOTPTA (the sole PTA producer) and ICI to boost their sales. On the other hand, Colgate Palmolive and Clariant do not engage in the polyester business.

STOCK PERFORMANCE

Beta analysis of the company over Jul’09-Mar’11 shows that the beta of Colgate Palmolive Pakistan Ltd. is low at 0.46, as given by the slope of the trend line. This indicates the stable stock returns in accordance with the secure demand/positioning of the company in the Personal Goods sector. However, it also means that the company stock will not experience a significant boost if market conditions show an improving trend. However, the beta improved from a value of 0.37 over Jul’09-Dec’10.

Stock returns of weekly continuously-compounded returns shows that the standard deviation of these stock returns is 6.6%. The future stock returns are expected to vary with a standard deviation of 6.6% and have been fairly volatile over Jul’09-Mar’11. Returns volatility is seen to be decreasing over the period, showing stability being achieved in the stock price.

MARKET COMPARISON

This market comparison has been made on the basis of ICI Pakistan, Clariant Pakistan, LOTPTA and Colgate Palmolive annual report figures. Fiscal year for ICI, Clariant and LOTPTA is January 2010 to December 2010 whereas for Colgate Palmolive the fiscal year is July 2009 to June 2010. Hence the comparison is only indicative, and the companies may have been subject to different conditions during their respective periods under review.

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Industry Col. Pal
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LIQUIDITY
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Current Ratio 2.16 2.85
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ASSET MANAGEMENT
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Inventory Turnover Days 51.53 41.86
Days Sales Outstanding 26.36 10.03
Operating Cycle 77.89 18.75
Total Asset Turnover 1.34 0.35
Sales/Equity 3.30 3.22
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DEBT MANAGEMENT
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Debt to Asset Ratio 33.50 25.58
Debt to Equity Ratio 0.80 0.34
Long Term Debt to Equity 0.21 0.06
Times Interest Earned 55.23 160.86
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PROFITABILITY
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Gross Profit Margin 22.90 33.22
Profit Margin 9.17 9.99
Return on Assets 17.25 23.96
Return on Equity 31.18 32.19
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MARKET VALUE
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EPS 22.61 42
Book Value 84.69 130.22
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The comparison of the company’s ratios with industry averages shows that the liquidity position of Colgate Palmolive at 2.85 is better as compared to industry average of 2.16. The inventory turnover in days at 41.86 is lesser than industry average of 51.53 showing that the company has strong inventory management practices as compared to industry.

However, the day-sales-outstanding of 10.03 is lower than the industry average of 26.36 indicating that receivables are being managed inefficiently at the company. The total assets turnover is lower at 0.35 compared to 1.34 in the industry showing that the company is not generating an adequate amount of sales to justify the total investment in assets. Sales-to-equity ratio is slightly lower at 3.22 compared to 3.30 industry average because the company has a higher ratio of equity-to-debt in its capital structure.

Debt to asset ratio is lower at 25.58 compared to 33.50 for the industry because of the lower utilisation of debt. Debt to equity is also lower at 0.34 compared to 0.80 for the industry. The long-term debt to equity is low at 0.06 compared to 0.21, indicating that the company has relatively low long-term debt as compared to industry average. The company seems to be using less leverage than it might use. The TIE is also high at 160.86 compared to 55.23 for the industry, due to the low finance cost.

The gross profit margin of Colgate Palmolive is higher at 33.22 compared to industry figure of 22.90 indicating better management of cost of goods sold. However, the net profit margin is only slightly higher at 9.99 compared to 9.17 for the industry, suggesting higher selling, distribution and administrative expenses. Return on assets is also high at 23.96 compared to 17.25 for the industry. However, return on equity is marginally higher at 32.19 compared to industry average of 31.18, due to the higher proportion of equity.

The EPS is high at Rs. 42 per share compared to Rs. 22.61 per share in the industry indicating the strong position of the company. The book value per share shows a similar comparison at Rs. 130.22 per share compared to Rs. 84.69 per share in the industry.

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2009 2010 % Change
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Turnover 13,994,706 14,583,936 4.21
Net turnover 11,184,930 11,529,310 3.08
Cost of sales 8,482,756 7,699,401 -9.23
Gross profit 2,702,174 3,829,909 41.73
Selling and distribution costs 1,345,967 1,846,098 37.16
Administrative expenses 102,024 142,021 39.20
Profit from operations 1,194,972 1,775,228 48.56
Finance costs 48,867 11,036 -77.42
Profit before taxation 1,146,105 1,764,192 53.93
Taxation 396,139 612,553 54.63
Profit after taxation 749,966 1,151,639 53.56
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PERFORMANCE IN FY10

Gross turnover of the company increased by 4.21% over FY09 to FY10 due to general inflationary increase in sales. The increase in net turnover was lower at 3.08% due to slight increase in sales tax. The cost of sales, however, fell by 9.23% and this shows that cost of manufacturing was managed better in FY10, thus improving the gross profit margin by 41.73% from Rs. 2,702,174,000 in FY09 to Rs. 3,829,909,000 in FY10.

On the other hand, the selling and distribution costs, and the administrative expenses increased by 37.16% and 39.20% respectively over FY09-10. This increase was due to increase in overheads as a result of high inflation as well as rupee devaluation. Frequent increases in electricity tariffs and power outages added substantially to the costs. Furthermore, due to unstable law and order situation in the country, security cost as well as insurance cost increased.

Overall, the profit from operations showed an increase of 48.56%, which is an indication of strong market position of the company. The finance cost decreased dramatically by 77.42% caused by decreased mark up payments due to divestiture of long-term loan in FY10. However this was offset by the increase in taxation by 54.63% led to an overall 53.56% increase in net profit after taxation.

RATIO ANALYSIS (FY04-10)

The gross profit margin of the company improved from 24.16% to 33.22% over FY09-10 due to improved management of manufacturing costs, despite increase in raw material oil prices. The net profit margin showed a similar increase from 6.71% to 9.99%. The return on assets improved from 19.03% to 23.96% and the return on equity from 27.77% to 32.19%, showing that the net income earned justified the investment into assets in the company.

The current ratio increased from 2.52 in FY09 to 2.85 in FY10. This was due to improving liquidity position of the company due to increase in inventory from Rs. 1.128 billion to Rs. 1.322 billion. Current maturity of long-term loan decreased from Rs. 2 million to Rs. 625,000, thus causing the current ratio to increase.

The day sales outstanding decreased from 11.08 in FY09 to 10.03 in FY10, indicating that the management could not efficiently monitor its receivables. Inventory turnover in days fell from 64.67 in FY08 to 36.83 in FY09 but improved to 41.86 in FY10, showing that inventory management significantly improved over the period FY08 onwards and lesser days were required to sell the same amount of inventory.

Total asset turnover fell significantly from 2.72 in FY08 to 0.42 in FY09 and further declined to 0.35 in FY10. This was due to increased investment in fixed assets, however the sales did not how the expected proportionate increase, leading to this decline in total assets turnover. However, the sales to equity ratio decreased over FY09-10 from 4.14 to 3.22 due to issuance of further shares by the company.

The debt to assets ratio of the company decreased from 31.47 in FY09 to 25.58 in FY10 due to decrease in long-term liabilities of the company. Debt to equity ratio showed a similar trend from 0.46 in FY09 to 0.34 in FY10. Long-term debt to equity ratio decreased significantly from 7.59 in FY08 to 0.06 over FY09 to FY10 due to divestiture of long-term loan and issuance of shares in FY10. Times interest earned showed a huge increase from 24.45 in FY09 to 160.86 in FY10. This was due to significant decrease in interest expense as well as increase in EBIT in FY10.

Book value per share improved from Rs. 113.04 in FY09 to Rs. 130.22 in FY10, since the earnings of the company were reinvested instead of being paid out as dividend. The EPS showed a similar trend from Rs. 31.4 to Rs. 41.92. The market price per share increased from Rs. 360.82 to Rs. 391.2 showing that the market’s confidence in Colgate Palmolive Pakistan Ltd. Improved in the FY10. The price earnings ratio declined from 11.49 in FY09 to 9.33 in FY10. This was due to the fact that increased in market price was not as great as increased in EPS.

FUTURE OUTLOOK

The company has continued to focus on reassessing the changing needs of its customers, and investing in product quality and innovation. These changes along a diverse portfolio have helped the company to attain its overall growth objective. Tough market situations in are expected to continue. Though recent trends have shown slight signs of macroeconomic stability, this recovery is still fragile and is threatened by the pressures building up on the fiscal account deficit, further energy shortages, persistent inflation, uncertainty hovering around the political front and continued disruptions on account of law and order situation. Furthermore the costs of basic raw materials like crude oil have started to show an upward trend in the international market, which is likely to impact profitability margins. The company intends to take steps in maintaining tighter controls on overheads. Colgate will use its best efforts to maintain current trends in the future as well by employing strong marketing programs, cost reduction initiatives and product renovations.

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