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Colgate: A SWOT analysis

A name synonymous with the Indian oral care industry, Colgate (COLGd.BO, news) , is the
undisputed market leader in toothpastes with over 45% share in the Rs 21 bn (90,000 TPA) oral care
segment. The company's parent has a presence in over 200 countries worldwide. In India, Colgate ranks
No.1 in top of the mind recall in many consumer surveys. Let's take a look at the company's journey
over the years and what's in for it in the future.
Background
Promoted by Colgate-Palmolive USA, the parent operates through its 51% subsidiary and has a presence
in India since last 50 years. The company's flagship product, Colgate Dental Cream is the largest selling
toothpaste in India, with an estimated market share of over 30%. The company acquired Hindustan Ciba
Geigy (Cibaca) in the year 1994, which helped it increase its market share. The company also has a
significant marketshare in the toothbrush category. This and shaving brushes accounted for 10% of its
FY04 revenues.
The toothpaste segment can be divided into two broad categories: White's, which accounts for a
dominant share of the Indian oral care market. Gels are estimated to be only about 15% plus of the
market.
Colgate is considerably backward integrated. It has captive manufacturing facilities for flavor and other
ingredients, which yield significant cost savings. It has also set up a world-class facility for manufacture
of Di-calcium Phosphate, a key ingredient in toothpaste.
The journey over the years�
(Rs m) FY0 FY0 FY FY FY C 9mFY05
0 1 02 03 04 A
G
R
Sales 10,8 11,7 11, 9,4 9, - 7,242
96 69 609 74 39 4
2 %
Other Income 228. 295 310 35 29 7 217
9 8 9 %
Expenditure 10,2 10,8 10, 8,1 7, - 5,995
31 01 544 70 92 6
8 %
EBDIT 665 968 1,0 1,3 1, 2 1,247
65 04 46 2
4 %
OPM % 6.1 8.2 9.2 13. 15 ~ 17.2%
% % % 8 .6
% %
Net profit after tax(loss) 518 625 698 88 1, 2 809
7 08 0
 0 %

From the above table, we infer that although topline has shown a degrowth of 4% on a compounded
basis over the 5 year period, bottomline has grown at a good 20% rate in the same period. The company
has been able to curtail its expenditure, which went down by 6% during the period under consideration.
Operating margins have been increasing YoY and in 9mFY05 touched a peak of 17%.
The key reason for a significant improvement in operating margins over the years is the reduction of
advertising expenditure (see chart).

The company has lost significant market share in toothpaste that had peaked at 65% in FY95, as
compared to 45% plus today. Most of this has been lost to HLL and smaller players like Dabur and
Anchor.
The potential
As per our estimates, 12.2% of the total world population lives in rural India. Currently, only a small
portion (about 15%-20%) of region has been tapped. Although, expansion in rural areas requires huge
investments, it is a market that cannot be overlooked and has huge potential. To put things in
perspective, the per capita consumption of toothpaste in India is only 82 gms, as compared to 262 gms
for Thailand, 376 gms for Mexico and 518 gms for USA (Source: Colgate, Equitymaster Research). In
India, urban per capita consumption is 153 gms whereas rural consumption is a mere 38 gms.
Competition
The company has been facing immense competition from organised as well as unorganised players. HLL
is the closet rival of Colgate with a share of 34% with its Pepsodent and Close-up (gel where it has a
lion's share) brands.
The latest entrant in the organised sector is LG that has ventured into the FMCG market and launched
premium consumer products across 8 categories including toothpastes, shampoos, soaps, detergents, etc.
Also, there has been speculation from sometime now that P&G (its worldwide rival) would debut its
billion-dollar-plus toothpaste brand Crest in India. This could intensify competition in the segment.
Concerns
The company has high reliance on a single category (Oral Care), which accounts for 94% of its sales and
98% of its profits (FY04). A large part of the company's product folio consists of premium products,
which do not have a large potential market in India. This is evident as new launches by the parent in
India have been much lower than other markets. In the last couple of years, the company's topline has
stopped growing and in order to achieve growth, Colgate cut prices of its products by an average 17% in
April 2003 (Source: Company Annual Report). The company has been able to increase its margins by
continuously cutting advertising expenses, which cannot go below a certain point, owing to its single
 product dependence.
What to expect?
At the current price of Rs 180, the stock trades at a rich valuation of 23x annualised 9mFY05 earnings
and market cap to sales of 2.6x. Though per capita consumption of oral care products in India is poor
compared to even other developing nations, it is essentially a long-term story. In our view, the prospects
of the company are still too leveraged on one product, which is facing intense competition in the market.
With P&G's intended entry in the segment, things could get rough in FY06 and FY07.
However, one key thing that could to keep the earnings expanding in FY06 is that Colgate is setting up a
new facility in the tax free zone of Baddi (Himachal Pradesh), which will start commercial production in
April '05. Another key thing investors need to consider is that globally, the parent plans to close a third
of its 78 manufacturing units and India could be a favored destination for outsourcing toothpaste.
Currently, the China plant produces over 900 m toothbrushes per year and supplies to over 60 Colgate
subsidiaries worldwide. The parent has a 5-year plan of cutting down toothpaste and bar soap
manufacturing locations to 15 each and toothbrush manufacturing locations to 8 globally. For Colgate
India, whose exports stand at Rs 176 m (FY04), which is only 2% of sales, this could be a good trigger
in the long term.
In conclusion, the company is likely to see continued bottomline expansion over the next one year owing
to tax benefits and operating leverage but revenue growth will remain challenging. As of now, Colgate is
not among our top picks in the FMCG space.

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