Financial Statement Analysis Submission under the
Prof. Vinay Nangia
DoMS, IIT Roorkee
Table of Contents
1. Purpose of the Study...........................................................................................................................3
2. FMCG Industry Overview....................................................................................................................4
3.Introduction of the Company................................................................................................................7
4. CapitaI History of the Company........................................................................................................11
5. Sources of Funds...............................................................................................................................13
6. Applications of Funds........................................................................................................................16
7. Advertising and Promotion Expenses...............................................................................................21
8. Financial Performance......................................................................................................................24
9. Operational Performance.................................................................................................................26
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
• 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.
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.
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
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
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.
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.
Liquid Hand Wash
From the Dentists
Mouth Ulcer Treatment
Source: Colgate-Palmolive India Ltd. website
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 hubs
2. Extension of Colgate Business Service Centers (CBS) and streamlining of global functions; and
3. Optimization of the Global Supply Chain and Facilities.
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:
Colgate Research Centre, Mumbai, India
M. V. Deoras
Rs. 13700.00 Lakh
Rs. 1359.93 Lakh
Rs. 332420.91 Lakh
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 years
Sales Increase from last year (%)
PBT Increase from last years (%)
PAT Increase from last year (%)
Source: 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:
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
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.
3.2 SWOT Analysis
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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.
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.
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.
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.
No. of Shares (In
Preferential issue to Colgate-Palmolive
Preferential issue to Employees and
Colgate-Palmolive (USA) Company
Source: Colgate-Palmolive India Ltd. website
Cumulative Number of
Shares (In Millions)
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.
• Enhance Shareholder value and improve the Return on Equity by using the excess cash.
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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
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
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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
17473.0 20172.9 22861.1 26932.2 31638.05
Non-Operating revenue 552.62
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18025.7 20609.1 23273.5
Source: 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 companies
The 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 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
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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
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
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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 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.
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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)
FY2008 FY2009 FY2010 FY2011
Salaries, Wages ad Bonus
9946.85 11959.0 14448.6 17219.1
Contribution to Provident Fund,
Gratuity and Other Funds
Staff Welfare Expenses
Voluntary Retirement Schemes
Total Employee Expense
11827.6 14340.6 15907.3 19322.3
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.
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 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
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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)
FY200 FY201 FY201 FY2012 FY2013
Purchase of Fixed Assets 243.50 3551.28 4110.53 10222.3 15471.76
Sale of Fixed Assets
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
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to the increasing demand of our products. The new factory is scheduled to commence commercial
production 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
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)
FY200 FY201 FY201 FY201 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
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 %)
FY200 FY201 FY201
Colgate-Palmolive India Ltd. 134.2
Hindustan Unilever Ltd.
Dabur India Ltd.
Source: 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 %)
FY200 FY201 FY201 FY201
Colgate-Palmolive India Ltd. 156.3
Hindustan Unilever Ltd.
Dabur India Ltd.
Source: 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 Players
FY200 FY201 FY201
Colgate-Palmolive India Ltd. 22.25
Dabur India Ltd.
Source: 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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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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Annual Reports of Colagate-Palmolive India Ltd.
Annual Reports of Hindustan Unilever Ltd.
Annual Reports of Dabur India Ltd.
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