Colgate - multiple growth drivers; long-term story intact; visit note; Hold

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

Colgate (CLGT IN, INR 827, Hold)

An insight into the company’s business of Colgate-Palmolive India (Colgate).

n  Fit to compete; been there, done that

Colgate could face tough competition in the toothpaste category with the likely entry of new players. In the past, however, company has been very aggressive in capturing market share from competition, be it developing markets like Brazil, Mexico and China, or developed markets like US; it has managed to beat other global players. Also, strong distribution network, almost generic brand and huge customer acquisition initiatives will provide high entry barriers to new entrants. 

n  Sufficient growth drivers in place    

Colgate is likely to continue growing on the back of: (a) increase in penetration (toothpaste penetration is ~56%; ~500 mn Indians don’t use toothpaste); (b) rise in per capita daily consumption (India is at 180 gms/year vs. China at 275 gms/year and Thailand at 375 gms/year); (c) higher sales of personal products; (d) premiumisation; and (f) new products. Contribution of premium products to net sales doubled from 0.6% last year to 1.2% this year.

n  Multiple strategies to straddle pyramid; new product launches planned  

Colgate has adopted a dual strategy: To educate consumers on using toothpaste once in rural markets and twice in urban. Also, it is closely working with primary and Anganwadi school teachers to spread awareness about oral health with rural consumers. Colgate has recently launched 360-degree toothbrush (sophisticated design which is difficult to replicate by local players) and Palmolive Aroma shower gel. Colgate Sensitive toothpaste and mouth wash are now market leaders in their respective categories.

n  Outlook and valuations: Robust; maintain ‘HOLD’

Colgate’s brand equity and distribution remain huge advantages. We believe Q3FY11 A&P expense (~21.6% of sales) was largely one off and expect it to be ~16%, on an annual basis going forward. Though P&G is likely to enter the oral care market, we remain confident about Colgate’s positioning by looking at the experience in other markets. Hence we maintain ‘HOLD/Sector Underperformer’ recommendation/rating on the stock.