Initially incorporated as National Detergents Limited, a 100% local company in 1977, Colgate-Palmolive Company USA, granted licence to manufacture and market their products in Pakistan in 1985. In 1990, Colgate-Palmolive Company joined as equity partner in the company and the name was changed to Colgate-Palmolive (Pakistan) Limited.
Colgate Palmolive offers a long range products in various categories, including oral care, personal care, surface care and fabric care. The year under review was marked with political unrest and economic instability in the country, creating tension and insecurity in public and affecting the sales and growth of all the industries of the country.
But this was not the case with Colgate Palmolive, as its growth was not hampered due to these reasons. However, inflation and increased prices of raw materials and rising oil trends all over the world forced the profit margins of the company to go down and caused the prices of its products to go up, in spite of all efforts to make the prices affordable for consumers.
In spite of the rising prices, political and economic instability, Colgate had an impressive growth in its sales around Rs 8.977 billion in this year, as compared to Rs 7.446 billion of last year, showing an increasing trend of about 20.56% as compared to the 18.5% increase in FY07. The gross profit was lower than expected due to the rising costs of raw and packing materials as the effects could not be completely shifted to the public, as a result, the gross profits showed an increase of 11.54% to Rs 2.097 billion from Rs 1.880 billion of FY07.
The operating profit of the company was Rs 1.041 billion from Rs 911 billion of last year, showing a growth of 14.27%. The profit after tax for the year was Rs 679 billion from Rs 605 billion last year, with a growth of 12.23%. The company maintained its selling expenses to show only an increase of 8.20% and the administrative expenses to rise by 20.93%. This efficient performance resulted in increase of earning per share to Rs 35.55 from Rs 31.65, with a growth of 12.32%.
FINANCIAL PERFORMANCE (FY03-FY08)
Over the years, Colgate has maintained positive financial position and placed itself among the leading chemical companies of the country. A brief analysis of Colgate's financial performance is discussed below. Overall, Colgate Palmolive's profitability depicted a commendable performance. Although total net sales volume increased by around 20.56% over the last year, yet the impact of the increase in sales was not able to convert completely into a consequent rise in the gross and net profits.
The main reason behind it were the increase in prices of raw and packing materials and petroleum based products causing the profits of the company to decrease as the company could not convert the rising costs completely into product prices due to marketing constraints. However, tighter controls on selling and administrative expenses focused advertisements, innovative & efficient supply chain strategies, effective communications and improved sales mix ensured that the effect of rising cost of goods sold was mitigated. Consequently, the gross and net profit margins decreased compared to the previous year.
Also, both ROA and ROE have shown a marginal decline in FY08 because of high COGS due to above-mentioned reasons. Colgate Palmolive has shown a positive liquidity trend over the years, enjoying a strong liquidity position over the years. The liquidity trend has mostly been in an increasing trend, with decreasing only in FY06. Since 2006, the company has once again raised its current ratio to a positive trend, continuing in FY08. The net current assets of the company have shown a rise in terms of cash, inventories and receivables, as have the current liabilities. However, due to the decrease in short term borrowings and a greater percentage rise in current assets, the overall liquidity position of the company is surely appreciable.
As result of the manifestation of an efficient credit policy, the days sales outstanding of the company have been following a declining trend till FY06, showing that the company is receiving cash against its receivables on a shorter period over the years. In FY07 and FY08, the DSO rose slightly, declaring that the policies have to be reviewed again. The inventory turnover ratio, however, has witnessed a rising trend over the years as it was declined only once in 2006. In FY08 we saw DSO and ITO again rose from their values of FY07.
However, one can see slight increases in both ITO and DSO in FY08 mainly due to higher receivables and higher raw and packing materials inventories. As a result, the operating cycle increased, but overall, the operating cycle has maintained a steady position over the years, showing that the company has maintained its performance in terms of receiving cash against its inventories.
The total assets turnover ratio has slightly declined over the years. The total assets growth of the company outpaced the phenomenal growth shown by net sales over the years. A major portion of this increase in assets was comprised of an increase in plant and equipment, cash and bank balances, and inventories. In recent two years, ie 2007 and 2008 the declining trend of TATO was more caused by the rising costs leading to rising prices of products that negatively affect the sales. Also the unstable political and economic conditions of the country were partly a cause of the low growth in sales as compared to the growth in assets.
However, the fact that the asset turnover did not show a positive trend indicates that the company needs to work more on maximizing the gains from an increase in assets. Sales/Equity also showed a decline over the years, which became smaller with the passage of time as the company tried to control the situation.
The decline in sales/equity was due to the aforementioned reasons. Yet after observing the ongoing decreasing differences in the TATO and sales/equity it could be hoped that if the company managed to continue its efforts these trends could turn positive in a couple of years.
Even though Colgate's short-term debts showed an increase due to an increase in the creditor's liabilities and taxation, the long term liabilities portrayed a considerable decrease over the years, especially in the long term loans and the liabilities against assets subject to finance leases.
In FY08, the trend was reversed, as the long-term debts showed more increase then the short-term debts of the company. But on the whole, we can say that the company has managed its debt very efficiently, with long term debt to equity ratio only marginally increased in FY08.
While both total assets and total equity increased over the years, and the overall effect was manifested in a declining debt-to-asset and long-term debt-to-equity ratio. Al these ratios along with D/E ratio have shown Colgate's reduced reliance on debt financing.
Owing to a magnanimous increase in the operating profit over the years, especially during FY06 when it increased by 62.5%, and a decline in the financial charges (till FY06), the Times Interest Earned ratio of the company improved. The reason for higher TIE in FY07 is due to higher EBIT than finance cost. In FY08, the TIE, though still maintaining an impressive figure, fell than last year.
This was due to the combined effect of lower increase in EBIT than last year coupled with higher finance costs. Yet the high TIE ratio is a positive indication of the fact that the company is managing its financial obligations well and is generating enough operating profit to cover up its interest and financial expenses.
The net earnings per share increased by 64.7% in FY06, but declined in FY07 due to a high number of outstanding shares. In FY08, the share value declined even further due to the issuance of more shares by the company. The book value of the business increased slightly thanks to an increase in equity facilitated by a steady rise in reserves over the years.
The average market price of the shares of the company increased considerably over the years by approximately 77%, 9%, 82% and 28.4% during 2004, 2005, 2006 and 2007 respectively. In 2008, the increase in market price was 29.57%. As a result P/E ratio has also posted a rising trend over the years. The company has been giving its shareholders a healthy dividend over the years.
Even in 2007 when it raised its number of outstanding shares, it still managed to give a healthy dividend. The dividend per share of the company has been on a rising trend since the past 5 years under review. Only in 2008, it declined from Rs 16 per share to Rs 10 per share, due to the combined effect of low growth in net income coupled with the increased number of shares issued by the company during the year. Still the dividend proposed by the company is healthy and is lucrative to future possible shareholders.
FUTURE PROSPECTSOverall, Colgate Palmolive has been a profitable and praiseworthy company that has managed to adapt itself to the changing marketing environment and the needs of its customers. The company has been facing the challenges of inflation and cost escalations due to increasing prices of raw material and energy costs throughout the year.
As the current market scenario has observed the declining oil prices all over the world, hence the future costs of the company will not be as high as in current year, but the rising inflation in the country and the current political and economic scenario will continue to be challenging.
The main goal of the company will be to look for ways to reduce the costs of production, rather than to shift the burden to the public through increased prices of products. However, Colgate will use its best efforts to maintain current trends in the future, along with increasing the trends that have gone down in the recent year due to high costs as well by employing strong marketing programs, cost reduction initiatives and product renovations. Hence one can foresee a positive outlook.
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COLGATE PALMOLIVE - CONSOLIDATED RATIOS
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2003 2004 2005 2006 2007 2008
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Rupees in '000
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LIQUIDITY
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Current Ratio 1.51 1.36 2.01 1.91 2.14 2.56
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ASSET MANAGEMENT
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Inventory Turnover 45.42 47.70 50.30 45.34 48.20 51.51
Days Sales Outstanding 12.85 10.32 7.69 7.61 8.75 8.98
Operating Cycle 58.27 58.02 57.99 52.95 56.95 60.49
Total Asset Turnover 2.60 2.39 2.55 2.37 2.24 2.27
Sales/Equity 5.65 5.16 4.12 3.85 3.48 3.33
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DEBT MANAGEMENT
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Debt to Asset Ratio 54.91 54.35 38.12 38.48 35.59 31.76
Debt to Equity Ratio 1.19 1.17 0.62 0.63 0.55 0.47
Long Term Debt to Equity 28.15 26.96 15.75 8.67 7.32 7.59
Times Interest Earned 13.28 31.98 33.16 58.81 61.58 52.37
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PROFITABILITY
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Gross Profit Margin 27.69 28.73 27.00 32.27 31.67 29.40
Profit Margin 6.40 8.57 7.73 9.97 10.19 9.52
Return on Assets 16.63 20.51 19.70 23.63 22.82 21.65
Return on Equity 36.16 44.23 31.84 38.40 35.43 31.72
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MARKET VALUE
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Book Value 3.96 5.30 7.78 10.62 11.17 11.21
EPS 14 23 25 41 40 36
Average Market Price 103.89 184.46 201.06 366.05 470 609
Price/Earnings 7.26 7.86 8.12 8.97 11.88 17.58
Dividend per share 7.00 10.00 12.50 16.00 16.00 10.00
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