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 companyhas 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, ascompared to 45% plus today. Most of this has been lost to HLL and smaller players like Dabur andAnchor.
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 hugeinvestments, 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 gmsfor Thailand, 376 gms for Mexico and 518 gms for USA (Source: Colgate, Equitymaster Research). InIndia, urban per capita consumption is 153 gms whereas rural consumption is a mere 38 gms.
The company has been facing immense competition from organised as well as unorganised players. HLLis the closet rival of Colgate with a share of 34% with its Pepsodent and Close-up (gel where it has alion'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.
The company has high reliance on a single category (Oral Care), which accounts for 94% of its sales and98% 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 inIndia have been much lower than other markets. In the last couple of years, the company's topline hasstopped growing and in order to achieve growth, Colgate cut prices of its products by an average 17% inApril 2003 (Source: Company Annual Report). The company has been able to increase its margins bycontinuously cutting advertising expenses, which cannot go below a certain point, owing to its single