Amongst the premier stocks that bucked the bloodbath in the markets was the scourge of cavities, Colgate Palmolive India (Colgate). The stock was up almost 8% when its distinguished peer and fiercest competitor Hindustan Lever went with the tide and crashed 8%. With an almost 19% weight in the Sensex, the fall in HLL, arguably, has been one of the factors in the crash in the Sensex.
Colgate’s however seems to be getting its act together after undergoing a harrowing time in 1999 when HLL turned the heat on in the toothpaste market. (With a turnover of almost Rs 6 bn accruing from oral care last year, HLL is reported to have spent almost Rs 1.5 bn on marketing, almost equivalent to Colgate’s advertising budget which has an oral care turnover almost double that of HLL, which helped it sew up a 35% market share of the Rs 20 bn oral care market.)
First, it introduced an entire range of toothpaste to match HLL's segmentation. Thus Colgate Dental Cream was repositioned as Colgate Supershakti. Next came the Gel variant followed by Colgate Total, Colgate Sensation Whitening and Colgate Stripes. 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. (The rural market in India comprises over 700,000 villages).
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.
However, the fact remains that the toothpaste market itself has been growing at 6% only and despite regaining a 3% market share Colgate’s topline growth cannot exceed 12% in the current year since increase in realisations can be limited. While the first quarter of the current year saw a 22 percent jump in the topline, this was primarily due to new product launches and pushing these products through its distribution pipeline. The pressure has begun to show with six of its eighteen distributors in Mumbai collectively resigning yesterday.
A comparative valuation with other consumer product companies suggests that the market rewards those with a higher sales growth. For example Hindustan Lever with a sales growth rate of 13% (over the last three year’s) has enjoyed a market cap/sales of 4.5 times, that compares with Colgate’s sales growth of 6% and a market cap/sales of 2 times. For Colgate to enjoy similar multiples, it needs to see sales revenues increase to around 15% per annum from its historic growth of 6% and our estimate of 12% for the current year.
A 15% turnover growth could turn around Colgate's valuations
Thus, while the stock looks relatively attractive vis-à-vis its peers (see table) it will take a while before the company returns to its heydays of 20% plus topline growth.
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