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Colgate – Valuations under threat

May 2, 2000

Oral care market in India is growing at a slower pace and in the past few years growth rate is further impacted due to continuous increase in the prices and increasing competition. Colgate is a leader in the market due to its distinct brand quality. Slower Growth Pace in Oral Care market with stiff competition

The dental care segment in India is over Rs 1 bn market and boasts of volumes to the tune of 65,000 tonnes per annum. Oral care penetration in India is still less than 30%. The rural market, which accounts for just 33% of the total oral care segment, is growing at the rate of 12-15% per annum as against a lower growth rate of 3% in the urban market. Colgate enjoys a huge 57% share in the rural market, which is expected to come under pressure, as HLL is becoming aggressive in this category.

Colgate dominates Rs 1.7 bn toothpaste market with a share of 52%. The toothpaste market in India is growing at a rate of 9-10% per annum in the last few years. The penetration level of toothpaste is as high as 75% in the urban market, which is growing at a slower rate. Against this demand in the rural areas is growing at a faster rate of 12-13%. The excise duty hike proposed in the budget led to price increases by the major consumer product companies. This further impacted the growth rate in the sector. In the past five months while overall market volume in the toothpaste segment declined by 2.4%, Colgate’s volume sales declined comparatively higher by 3.1%. However sales value has remained unchanged due to the impact of price increase.

Toothpaste Sales Sep-99 Feb-00 % change
Colgate (Rs m) 764 764 0.0%
Colgate (tonnes) 3,230 3,130 -3.1%
Market Volume (tonnes) 6,300 6,150 -2.4%

Strong Brand is Colgate’s Strength

Colgate dominates oral care market with its strong brand loyalty. However, in the past few years, it is facing stiff competition from HLL’s Close up and SmithKline Beecham Consumer Healthcare’s (SBCH) Aquafresh. Its overall market share declined from 50.1% in September 1999 to 49.9% in February 2000. On the other hand SBCH has gained market share to 3.4% during the above period. The only positive for Colgate is its success in increasing market share of its flagship brand Colgate Dental Cream (CDC). The brand has gained share from 39.6% in September 1999 to 41.5% in February 2000.

All India Market Share

Company Sep-99 Feb-00 % change
Colgate 50.1 49.9 -0.4%
HLL 36.2 35.5 -1.9%
SBCH 2.2 3.4 54.5%

Valuations:

At the current market price of Rs 142, Colgate is available at a P/E of 41 times its 9 months FY00 annualised earnings. Its lower market cap to sales ratio suggests that its long-term growth is a concern, as the market growth remains low and the competition intensifies. Comparative Valuation of Select Consumer Products Companies

Comparative Valuation

Particulars Colgate HLL SBCH
Market price (Rs) 142.2 2,394.9 349.0
Market cap/Sales (x) 1.8 5.2 2.2
P/E (x) 41.0 49.1 16.2


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