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Colgate - Brand valuation not reflected in market cap - Views on News from Equitymaster
 
 
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  • May 6, 2000

    Colgate - Brand valuation not reflected in market cap

    A brand is a result of the conscious effort of an organisation to create confidence in quality of its products and services. It is not an overnight effort. It reflects quality in all activities undertaken by an organisation as perceived by the customer's experience in dealing with the company. Colgate’s brand has proved this fact by consistently maintaining its number one position in the brand ranking of A&M's – ORG - MARG's annual survey, for several years now. Surprisingly Colgate’s brand valuation is not reflected in its market cap.

    The strength of Colgate’s brand is analysed as against a set of seven factors as determined by Interbrand (US).

    Leadership: Colgate is the leader in oral care market not only in India but also internationally. Although in the recent past the company has been facing stiff competition from FMCG majors, it has maintained its position through strategic investments in R&D and advertising. Also continuous new product introduction with high quality standards has enabled the company to remain ahead of others.

    International Potential: Globally Colgate Palmolive Company controls 30% of the US toothpaste market. The company serves the people in different segments like household care, fabric care and pet nutrition other than oral care and personal care. Currently, it enjoys the market capitalisation of $33 bn and a P/E of 37.6 times.

    Stability: Colgate's brand is well entrenched in the market with a high degree of consumer loyalty. The company has developed a good communication mix in order to create its brand stability. It has introduced its products in different packages both in rural and urban areas based on its customer needs.

    Market Prospects: Colgate has regained a part of its market share in the toothpaste and toothpowder segment with its strong brand promotion. In the past few years HLL's ‘Close up’, ‘Pepsodent’ and SmithKline Beecham’s ‘Aquafresh’ has given tough competition to Colgate in the oral care market. However Colgate's superior technology of products, low raw material cost, brand sensitivity, strong distribution and advertising network has proved to be stiff entry barriers for the new arrivals.

    Trend: The 60-year-old brand name Colgate is synonymous with the toothpaste. It has successfully created strong brand image and awareness in the minds of consumers since 1976. It is the internationally recognised brand. The company will be able to keep up the trend of the brand’s success with new product introduction from its parent's product portfolio, unique product quality and continued brand promotion thrust.

    Support: Colgate's brand has received strong advertising and R&D support. The company’s advertisement to sales ratio moved up from 4.6% in FY1993 to 17.2% in FY1999. Also R&D expenditure has moved up from 0.2% of sales in FY1998 to 3.5% of sales in FY1999.

    Legal Protection: Colgate is the registered brand, which prevents the other companies from using its brand name. By virtue of its impeccable track record, it has created enormous entry barriers.

      
      Market Cap
    to Sales (x)
    Advt. Exp. as
    a % to sales
    FY94 9.41 8.0
    FY95 6.26 9.4
    FY96 4.26 8.9
    FY97 4.06 11.6
    FY98 4.03 15.3
    FY99 3.19 17.3

    Ad expenses up, market cap down?
    Colgate’s advertisement to sales ratio has been rising for the last six successive years. The ratio has reached its peak and is expected to stabilise in FY2000. This could possibly result in a re-rating of the stock in the future. An interesting fact to note is that while the company’s advertisement expenses over the past six years grew at a compounded annual growth rate (CAGR) of 30.6%, its market cap declined at a CAGR of 14.6%. The market is completely ignoring the premium brand valuation of Colgate, which is reflected from the contraction in market capitalisation.

     

     

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