• OUTLOOK ARENA
  • COMPANY FOCUS
  • APRIL 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 2000Dec Q 2001Change9m FY019m FY02Change
Net Sales (incl. Excise duty)3,0132,950-2.10%8,8368,9461.20%
Other Income5035-30.00%13520048.10%
Expenditure2,8122,676-4.80%8,1768,2360.70%
Operating Profit (EBDIT)20127436.30%6607107.60%
Operating Profit Margin (%)6.70%9.30% 7.50%7.90% 
Interest 01  05 
Depreciation394310.30%132125-5.30%
Profit before Tax21226525.00%66378017.60%
Extraordinary income00 420 
Tax9010617.80%2732989.20%
Profit after Tax12215930.30%43248211.60%
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)136136  136136 
Diluted earnings per share*3.64.7  4.24.7 
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 2000Dec Q 2001Change9m FY019m FY02Change
Raw material/packaging cost1,6211,578-2.70%4,8374,699-2.90%
Staff cost13415414.90%39845915.30%
Advertising649569-12.30%1,7141,91211.60%
Others408375-8.10%1,2271,166-5.00%
Total2,8122,676-4.80%8,1768,2360.70%
As a % of sales      
Raw material/packaging cost53.80%53.50% 54.70%52.50% 
Staff cost4.40%5.20% 4.50%5.10% 
Advertising21.50%19.30% 19.40%21.40% 
Others13.50%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.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA, Canada or the European Union countries, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst)
103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407