Personal care: COLGATE-PALMOLIVE (PAKISTAN) LIMITED - Analysis of Financial Statements Financial Year 2003 - Q 2003 2009

28 May, 2009

Initially incorporated as National Detergents Limited, a 100% local company in 1977 Colgate-Palmolive Company, USA, granted the 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 products in various categories including oral care, personal care, surface care and fabric care.
COMPANY SNAPSHOT



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Name of Company Colgate Palmolive
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Ticker COLG
Sales 2008 Rs 8977 million
Sales 2007 Rs 7446 million
Market price (26-05-09) Rs 298
Market Capitalization (26-05-09) Rs 6927297570
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With all the rising prices and political and economic conditions of the country, Colgate Palmolive had an impressive growth in sales, of 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 increase of 18.5% of FY07. The gross profit of the company was lowered 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 of the company showed an increase of 11.54% by showing an increase of 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 the increase of 8.20% and the administrative expenses to rise by 20.93%. This efficient maintenance by the company resulted in an increase in earning per share from Rs 35.55 to Rs 31.65, with a growth of 12.32%.
RECENT RESULTS (Q3'09)
Despite the recent financial crisis hitting the entire economy of the country and also around the world, the companies were ready to recover from the depressions in the third quarter of the fiscal year 2009. During the third quarter of FY09, when the prices and costs of inputs stabilised, along with the stabilisation of the rupee, the company managed to improve its sales from previous times.
The sales during the nine months increased from Rs 5,022,202 thousand to Rs 8,284,705 thousand, showing an increase of around 65%. The cost of goods sold for the nine months showed massive increases, particularly due to the remaining high inflationary pressure and still higher than standard costs of imports. The COGS rose by almost 86% of the value of nine months of FY08, ie from Rs 3,482,802 thousand in FY08 to Rs 6,467,207 thousand in FY09. However, the rise in costs was only 2% on a QoQ basis. Due to this effect, the gross profits of the three quarters increased to Rs 1,817,498 thousand from Rs 1,539,400 thousand, with an increase of 18%, the first positive GP for FY09.
During the third quarter, the company incurred higher expenses than the previous quarters. The selling and administrative expenses both rose by 34%, while the other expenses were maintained and only increased by 4%. Operating income fell by 35% to Rs 18,122 thousand. The rise in expenses led to the increase in EBIT from Rs 779,401 thousand to Rs 795,337 thousand, still operating at a positive 2% increase.



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Recent Results (Q3'09) 9M'09 9M'08 % chg
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PKR '000
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Gross Sales 10,365,655 6,319,709 64%
Less: Sales Tax & Special Excise duty (1,589,021) (930,483) 71%
Trade discount (491,929) (367,024) 34%
Net Sales 8,284,705 5,022,202 65%
Cost of products sold (6,467,207) (3,482,802) 86%
Gross Profit 1,817,498 1,539,400 18%
Distribution and selling expenses (911,471) (679,030) 34%
Administrative expenses (70,370) (52,573) 34%
Other operating expenses (58,442) (56,101) 4%
(1,040,283) (787,704) 32%
Other operating income 18,122 27,705 -35%
Profit from Operations (EBIT) 795,337 779,401 2%
Finance cost (41,619) (18,770) 122%
Profit before taxation 753,718 760,631 -1%
Taxation (259,666) (262,583) -1%
Profit after taxation 494,052 498,048 -1%
EPS (Rs) 20.68 20.85 -1%
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RECENT RESULTS (Q3'09)
The financial costs rose heavily to Rs 41,619 thousand from Rs 18,770 thousand, a rise of 122%. The increase in financial costs was largely due to rising interest rates. This will still cause some problems for Colgate, as the interest rates will take some more time to go back to their initial levels. PBT was recorded at Rs 753,718, a decrease of 1% in 9MFY09 compared to 9MFY08. PAT was Rs 494,052 thousand for Q3'09 as compared to Rs 498,048 thousand for Q3'08, with a decrease of only 1%. EPS was Rs 20.68 as against Rs 20.85 in 9M08.
Performance of Colgate-Palmolive Pakistan Ltd. for the third quarter has been much better than the rest of the year. This shows us that the company has now started to progress again from its lower points during the crisis. Seeing the only 1% decrease from the profits attained in three quarters of FY08, we can be hopeful that the company will soon regain its previous level of profits and financial stability, specially with the further declining of input costs and interest rates as the economy further stabilises.
FINANCIAL PERFORMANCE (FY03-FY08)
Although total net sales volume increased by around 20.56% in FY08 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 without a concurrent increase in the product prices. However, tighter controls on selling and administrative expenses focused advertisements, innovative and 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. 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 the 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 seen more of a rising trend over the years, with the result of declining only once in 2006. In FY08 we saw the DSO and ITO again rise 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. 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 also because of the aforementioned reasons. Yet after observing the on-going 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 increasing in FY'08, while both the 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) of the company, 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 higher number of outstanding shares. In FY08 the share decline 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 increased considerably over the years, increasing by approximately 77%, 9%, 82% and 28.4% during 2004, 2005, 2006 and 2007 respectively. In 2008 the increase in market price was of 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 OUTLOOK
The company has been facing the challenges of inflation and cost escalations due to increasing 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 be not as high as 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 should 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.



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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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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].

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