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Colgate: ‘Oral care’ is the future - Views on News from Equitymaster
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  • Apr 6, 2002

    Colgate: ‘Oral care’ is the future

    The brand name ‘Colgate’ is synonymous with toothpaste. This world-renowned brand is sold in more than 200 countries. In India, the company has successfully replicated the strong brand image and awareness in the minds of consumers since 1976. The company manufactures and markets its oral care, personal care and household care products under the ‘Colgate-Palmolive’ brand name.

    Colgate India earns around 93% of its revenues from the oral care segment. The company is the leader in the 90,000 TPA oral care market with over 50% share. The oral care market has a penetration of only around 42% in India. This signifies a huge growth potential for Colgate going forward. Colgate’s strength lies in its strong and well-established distribution network.

    But despite the positives, Colgate is not having a dream run. For one, competition in oral care increased with the entry of HLL. Severe competition from HLL and other players led to the company consistently losing market share from 65% in FY95 to current levels of over 50%.

    Also, as against historical growth rates of 8-9%, the company has logged a growth of 4-5% in toothpaste segment during FY01. The slowdown in the growth rates was across categories with toothpowder recording 3% growth in volumes. In the past couple of years, stiff competition as well as stagnation in market penetration has led to decline in market share and pressure on operating margins.

    (Rs m) Dec Q 2000 Dec Q 2001 Change 9m FY01 9m FY02 Change
    Net Sales (incl. Excise duty) 3,013 2,950 -2.10% 8,836 8,946 1.20%
    Other Income 50 35 -30.00% 135 200 48.10%
    Expenditure 2,812 2,676 -4.80% 8,176 8,236 0.70%
    Operating Profit (EBDIT) 201 274 36.30% 660 710 7.60%
    Operating Profit Margin (%) 6.70% 9.30%   7.50% 7.90%  
    Interest 0 1   0 5  
    Depreciation 39 43 10.30% 132 125 -5.30%
    Profit before Tax 212 265 25.00% 663 780 17.60%
    Extraordinary income 0 0   42 0  
    Tax 90 106 17.80% 273 298 9.20%
    Profit after Tax 122 159 30.30% 432 482 11.60%
    Net profit margin (%) 4.00% 5.40%   4.90% 5.40%  
    Effective tax rate (%) 42.50% 40.00%   41.20% 38.20%  
    No. of Shares (eoy) (m) 136 136   136 136  
    Diluted earnings per share* 3.6 4.7   4.2 4.7  
    P/E ratio   31.3     31  
    (* annualised)            

    In the recently concluded December quarter, the company's topline has actually declined by over 2% indicating a tough market environment. Colgate has managed to grow its bottomline by controlling its advertisement expenses. Its advertisement cost declined by 12% YoY to Rs 569 m. Its ad expenses stood at 19.3% of sales, lower than 21.5% of sales witnessed in December quarter last year.

    It is not that Colgate reduced its promotional efforts, it seems more like an effect of declining ad rates. Another reason could be that its arch rival, Hindustan Lever's, media noise has reduced, thereby helping Colgate in reducing its own ad expenditure (Colgate's ad spend to sales ratio was the highest in the FMCG sector at 23% during 2QFY02).

    In the past seven years, while Colgate's sales revenue increased at a CAGR of 10.9%, promotional expenses witnessed a higher CAGR of 28.5%. The irony is that the company will have to continue to spend on promotional expenses in order to maintain its market share.

    (Rs m) Dec Q 2000 Dec Q 2001 Change 9m FY01 9m FY02 Change
    Raw material/packaging cost 1,621 1,578 -2.70% 4,837 4,699 -2.90%
    Staff cost 134 154 14.90% 398 459 15.30%
    Advertising 649 569 -12.30% 1,714 1,912 11.60%
    Others 408 375 -8.10% 1,227 1,166 -5.00%
    Total 2,812 2,676 -4.80% 8,176 8,236 0.70%
    As a % of sales            
    Raw material/packaging cost 53.80% 53.50%   54.70% 52.50%  
    Staff cost 4.40% 5.20%   4.50% 5.10%  
    Advertising 21.50% 19.30%   19.40% 21.40%  
    Others 13.50% 12.70%   13.90% 13.00%  

    As per August 2001 edition of A&M, Colgate's market share of the 90,000 tonne (Rs 21 bn) Indian toothpaste market stood at 50.9%, while HLL's share stood at 32.9%. However, at its analyst meet in November 2001, HLL said that its market share stood at 36.3% of the oral care market. This indicates that HLL has gnawed some share of Colgate's pie again. This is worrying and could hinder Colgate's plans to keep a check on its ad expenses going forward.

    But all said and done, Colgate seems no longer on the back foot. Though Colgate has lost market share, it has managed to stem the slide in the last couple of years to maintain a steady market share of 51%. It has achieved this not only by heightened advertising focus but also by introducing new sub-brands like ‘Total’, ‘Herbal’, ‘Gum care’ and new gel variants. It has also launched an exorbitantly priced (Rs 999) ‘Activa’ toothbrush. These new products have re-affirmed Colgate’s image as the pro-active market leader capable of introducing quality products. ‘Total’, ‘Herbal’ and ‘Gum care’ are positioned as premium products compared to the flagship, Colgate dental cream (CDC). Though Colgate was forced to reduce their price premiums later, the choice and the quality of products in its folio have given a boost to the ‘Colgate’ brand.

    Colgate has also initiated cost control measures to compete more effectively in the market. As one measure, the company has set up captive capacity for production of a key ingredient of toothpaste, di-calcium phosphate. The company has also initiated operation ‘Jagruti’ to improve its rural penetration. The aim is to educate the masses about oral care and its benefits vis-à-vis traditional teeth cleaning methods like ‘datoon’ (neem plant). It has also tied up with schools to educate children on oral care. Based on all this, Colgate looks set to maintain its dominant position in the Indian oral care market. What’s more, Colgate has set itself an ambitious target of taking its market share back to 61% in the next few years.

    In the short term, the company’s earnings numbers are unlikely to bring smiles to investors in the near term due to higher marketing expenses. In the long run however, Colgate’s focus on the oral care business will stand it in good stead as rural consumers expand. The ‘Colgate’ brand name as well as the quality of its products will ensure its dominant position in the oral care market.



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