Stock of the Month (June 2013) – Colgate
19 June, 2013
Price: Rs. 1,341.15
This Stock Analysis report presents a long term outlook and the future prospects of Colgate.
Indian oral care industry: enormous untapped potential
The Indian toothpaste market estimated to be Rs. 5,200 Cr is expected to grow at an annual CAGR of 9 % over the next 10 years offers enormous growth potential in long term given the low market penetration and even lower per capita consumption of toothpaste in India. A statistical comparison with some of the other markets draws attention to the opportunity which India presents.
Currently, 55 % of Indian population uses toothpastes and only 15% of them brush twice in a day as recommended by most dentists. In comparison, in developed markets like the U.S.A., up to 97 % people use toothpaste and up to 87 % of them brush twice in a day. The opportunity is highlighted further when we take into rural consumption of toothpaste in India which currently stands at ~ 45 % in comparison to ~ 89 % in urban market.
Per capita consumption
The chart presents data on the per capita consumption of toothpaste in USA and a few emerging Asian economies.
India consumes less than 1/4th the amount of toothpaste in comparison to USA. Compared to the other emerging economies of Asia, India’s per capita consumption of toothpaste is less than half.
As penetration level in India increases and as more and more people switch from the traditional dental care products towards toothpastes; the toothpaste market will see considerable growth.
Premiumisation & new products
In the urban landscape, companies are focusing on premiumisation of their product line. The sensitive / advanced oral care toothpaste segment is gaining rapid popularity on the back of increased awareness and aggressive advertisement campaigns educating tooth sensitivity. In early 2011, GSK Consumer Healthcare launched its Sensodyne range of toothpaste. This year, Colgate launched ‘Colgate Sensitive Original’ and ‘Colgate Sensitive Pro-relief’ to tap into the potential that this market offers. Hindustan Unilever has also entered this space with the launch of its Pepsodent Expert Protection toothpaste. As consumers learn more about dental conditions and the advancement in dental care, the premium segment toothpaste market will develop rapidly.
On January 2013, Colgate has also entered gum care segment with “Colgate Total Pro Gum Health”.
The mouthwash segment has been growing rapidly on the back of a low base share in the total oral care industry in previous years. Colgate has been aggressively marketing its ‘plax’ brand of mouthwash and has quickly cornered 26.5 % of the mouthwash market which makes it the second biggest player in the mouthwash segment. Johnson & Johnson’s Listerine continues to be the market leader.
Enhancing existing dominance
A logistical marvel, Colgate is one of the most widely distributed brands, with a presence in 4.85 million retail outlets out of a total of 5.72 million in India. The brand equity which Colgate enjoys is such that the word Colgate has almost become synonymous for toothpastes and oral care in India. For years, Colgate has dominated the toothpaste market in India. It is one of the few companies in the highly competitive Indian consumption driven market which has increased its market share over the years.
For FY 2013, Colgate dominated the toothpaste market with a market share of 55.40 %.
To win in a competitive market space, Colgate has positioned its toothpaste variants at different price points to cater to the market. The Company is focusing its advertising campaigns on graduating people from entry level toothpaste to a more superior offering.
In a bid to consolidate its position and market standing further, Colgate is setting up a new toothpaste factory at Sanand in Gujarat and a manufacturing facility for toothbrush in Andhra Pradesh. Toothbrush segment has also registered a healthy growth over the last few years helped by advertising campaigns asserting the benefits of frequent toothbrush. Colgate has consistently launched advanced toothbrushes such as its latest introduction, the 360 surround toothbrush; in a bid to upgrade consumers to a premium and higher priced product. With the existing market dominance and aggressive marketing campaigns, Colgate is set to achieve long term growth for its shareholders.
Strong Financial Position
Colgate has one of the strongest financial positions amongst all the listed companies. It has a total share capital of Rs. 13.60 crores and accumulated reserves in excess of Rs. 420 crores. The Company’s Return on Equity (“ROE”) has been consistently over 100 %. And its net profit margin over the last 5 financial years averages over 17.5 %. The Company has zero debt on its books and works on negative working capital. Typically, FMCG companies like Colgate receive payment for sale of their products before they pay for the raw material and their suppliers. This helps Colgate generate a large amount of free cash flow and accumulate reserves in expansion, increase its marketing budgets and to face competitive threats.
Threat of new entrants
Over the last decade, the Indian oral care industry has been dominated by few established players such as Colgate, Hindustan Unilever, Procter & Gamble (“P&G) and Dabur. Colgate has been successful in consolidating its market position by gaining market share from smaller players.
In the FMCG space there is always a threat of a new entrant especially that of an existing FMCG company who may want to expand their portfolio of offerings. If a new player with a big advertising budget enters the oral care industry, it will surely eat into the market share of the existing players. Previous examples illustrate that whenever a new player enters the FMCG space with a big marketing budget, it results in a dilution of the market share of the existing players. In case the new product does not get acceptability, this dilutionary effect could reverse otherwise it could be of a more permanent nature. It is likely that P&G will enter the Indian toothpaste market in due course. P&G has a strong presence in Indian toothbrush market with its popular Oral-b and crest brands. If P&G enters the toothpaste market as is widely anticipated, it would have some negative impact on the market share of Colgate.
Inflation: Rising cost of raw materials
For past many months India has been suffering from a high rate of inflation with the general level of prices for commodities and raw materials rising at an alarming rate. For FY 13, Colgate’s raw material expenses went up by 21 %. In comparison the Company’s sales increased by only 18 % (y-o-y).
While in most high inflation years Colgate has been able to pass on the cost to the end consumer and has been able to maintain its sales volumes, it may begin to put pressure on its margins if the trend of rising raw material prices continues.