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The fight back has begun... - Views on News from Equitymaster
 
 
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  • Mar 18, 2000

    The fight back has begun...

    The scourge of cavities,Colgate Palmolive India Limited (CPIL) seems to be on a comeback trail. Never known as a tough competitor in the past, the company is finally getting its act together. But first a look at what happened in the recent past.

    The company went through a tough time in FY99 when Hindustan Lever (HLL) turned the heat on in the toothpaste market. Initially, HLL took care not to attack the mother brand Colgate Dental Cream directly but positioned its Close up Gel on the freshness platform, Mentadent (later renamed as Pepsodent G) on the safety platform and Pepsodent on the dental care platform. Once it had built up a critical mass, HLL shifted gear, withdrew Mentadent and attacked with Pepsodent. It pumped in almost Rs 1.50 billion in advertising in FY 99, most of it aimed at building up Pepsodent and captured a substantial part of Colgate Dental Care's urban market share. (Latest estimates indicate a 35 percent market share for HLL in the overall toothpaste market.)

    The one fatal mistake that CPIL committed here was not using the Cibaca brand that it took over from Hindustan Ciba Geigy. The company took over Cibaca at a cost of Rs 1.30 billion and could have used the brand as a flank for its flagship Colgate Dental Cream. Alternatively, it could also have used the brand to launch products on the gel platform. However, the company chose to kill the product. In hindsight the takeover of Cibaca itself seemed a reactive strategy just to prevent HLL from doing so. The company paid a huge cost for it.

    The company ended the year with a net profit of Rs.456.4 million as against Rs 801 million in the last year (a fall of almost 43 percent). The first signs of a turnaround however were evident in the last quarter of the 1998-99. While net profits in the first three-quarters amounted to Rs 274.2 million, in the last quarter the net profits shot up to Rs.182.2 million.

    (Rs m) Dec 1998
    (9 months)
    Dec 1999
    (9months)
    Change
    Sales 7,505.0 8,285.0 10.4%
    Operating profit 562.0 707.0 25.8%
    Operating profit margin 7.5 8.5  
    Interest 2.0 1.0 -50.0%
    Depreciation 166.0 191.0 15.1%
    Other Income 56.0 87.0 55.4%
    PBT 450.0 602.0 33.8%
    Tax 175.0 278.0 58.9%
    PAT 275.0 324.0 17.8%
    Number of shares 136.0 136.0  
    EPS 2.0 2.4 17.8%

    CPIL was able to arrest the decline in its market share on the basis of a two pronged strategy. (The company claims to have a market share of around 52 percent in the toothpaste market and around 46.3 percent in the toothpowder market. Besides, it remains a market leader in the toothbrush market with a 45 percent market share, post Cibaca takeover.)

    Colgate's market shares: A turnaround in the offing

    First, it introduced an entire range of toothpaste to match HLL's segmentation. Thus Colgate Dental Cream was repositioned as Colgate Supershakti and seems to be doing quite well. Next came the Gel variant followed by Colgate Total, Colgate Sensation Whitening and Colgate Strips.

    Secondly, it refocused on strengthening its distribution network. So far, the Colgate toothpaste reaches 20,000 villages and the company plans a foray into 140,000 villages within next five year's.

    Even in the past Colgate, has come back after being written off, whether in the USA (vs. P & G) and in Thailand (vs. Unilever) following the same strategies of product segmentation, aggressive marketing and focus on distribution.

    During the first three-quarters also the performance seems to be on similar lines. While the first quarter topline saw a 22 percent jump in the topline, this was primarily due to new product launches and re-launching of Colgate Dental Cream and pushing these products through the distribution pipeline. What was encouraging however, was the increase in operating margins by 1.5 percent over the first half of the last year despite high decibel advertising. During this period, the company regained market share of around 3 percent. (The margins had dropped from 22 percent in FY 93 to 8.40 percent in FY99 primarily due to the increase in advertising expenditure as a percentage of sales from 8.5 percent in FY 96 to 20 percent in FY 99.)

    During the first nine months the company has reported a jump in the pre-tax profit by almost 34 percent over the corresponding period of the last year, a sign of much improved operational performance. The company has beefed up its management bringing in Mr. Derrick Samuel as managing Director (In the past Mr. Samuel headed Colgate's operations in the South Pacific and has a record of engineering volume growth and building strong trade partnerships) and Mr. Vikram Kaushik (who headed Britannia's bakery operations and achieved commendable results). CPIL remains a zero debt company and will continue to report a return on capital exceeding 20% in the current year too. The fightback has begun and one can hope for a sparkling performance in the coming year, tough competition from HLL notwithstanding.

     

     

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