Reasons to smile

POUND WISE

Sarath Chelluri / Mumbai October 20, 2008, 0:59 IST

Business Standard

Colgate-Palmolive’s dominant position, ability to sustain growth rates, improving financials and pro-shareholder policies make it a good bet.

A smile surpasses all boundaries; Colgate-Palmolive (India) strives to deliver a perfect smile, not only to its consumers, but for investors too. Colgate-Palmolive (Colgate) stronghold in the personal care business, primarily in the oral care business, which accounts for 90 per cent of its turnover, improving market shares and financials, a healthy dividend yield and importantly, good growth prospects make it a good investment.

These attributes will not only provide stability to the portfolio, but will also ensure healthy growth in the long-term.

Toothpaste

Colgate has maintained its market leadership in the toothpaste segment by occupying around 48-49 per cent in value terms since the last two years, aided by strong performance of its brands like Colgate Active Salt, Colgate MaxFresh and Colgate Cibaca.

The stranglehold in the toothpaste category is aided by a strong product portfolio catering to both economy and low-priced segments, which in turn, are backed by effective marketing strategies.

While the company has been able to hold on to its pricing power through the premium segment, volume growth has shaped up from low-priced brands like Colgate Cibaca (volume growth of 11-12 per cent), which is the leader in the low-priced category. Various initiatives have helped improve the company’s overall volume growth from about 6 per cent to 9 per cent in the last couple of years.

Cibaca has been able to create a niche for the company in the rural and semi-urban markets. As Cibaca is a low priced product, the growth is indicative that catchment consumers are gradually graduating to the tooth paste category.

In Q1 FY09, toothpaste category reported a smart 10.9 per cent rise in volume growth on the back of strong growth in rural demand; greater focus on Cibaca as “Value for money” product is proving to be beneficial. Little wonder that analysts expect the volume growth to hover around 9 per cent, on average, in the next few years.

Colgate’s current reach extends to about 79 per cent of the total market. Thus, the company’s initiatives of focusing on rural coverage with projects like ‘e-choupal’ and ‘Disha’ will not only drive the distribution in the remote corners, but also create brand awareness for Colgate.

Other segments

The Company occupies 46 per cent market share in the tooth powder market and the launch of “Colgate Cibaca Lal Dantmanjan”, a red tooth powder, in the last quarter of FY08, should only help fuel growth in the future. The demand from this segment will come from the rural or from the price-sensitive segments of the domestic population. In the long-run, as these consumers upgrade to the tooth paste segment, it should add to Colgate’s financials. In the toothbrush category, too, Colgate enjoys a dominant position. While market share was higher at 37.2 per cent in January-May 2008, volume growth was robust (32 per cent in Q1 FY09).
 

The company has been expanding its presence in the personal-care category through its ‘Palmolive’ brand. From shaving creams and soaps, it has a visible presence in the higher-end shower gels and hand washes currently.

In fact, the market size of the latter two categories is currently small but possesses high growth potential; expect these categories to emerge large and contribute in a meaningful manner to Colgate’s financials in future.

Financials

For the last five years, Colgate’s total income grew by a modest 8 per cent, but delivered a creditable 12 per cent in FY08, which has subsequently risen to 18 per cent in Q1 FY09. While a part of the growth is aided by price-hikes, the company’s strategy of new launches (including variants), increased investment in marketing and promotions has led the surge in growth rates in the recent past. In fact, the rise in overall volume growth to around 8-9 per cent and that too, in a profitable manner, is reflective of the improving performance of the company’s core business.

The greater production at Baddi, a tax haven, has meant increased income tax savings, which is getting reflected in the higher growth in net profits (net profits rose by 45 per cent in FY08). To improve its supply chain management, the company acquired a controlling in four of its contract manufacturers (in oral space) in the last 12 months.

In November 2007, the company completed a capital-reduction plan thereby reducing the face value of each share from Rs 10 to Re 1, by returning Rs 9 per share back to the shareholders. This measure was aimed at returning back the surplus cash as well as improving profitability metrics like return on equity (ROE) and return on capital employed (ROCE).

Consequently, ROE jumped from 118 per cent in FY07 to 310 per cent in FY08 and ROCE also rose from 58 per cent to 105 per cent in the same period. The company, otherwise too, has been shareholder friendly given the high dividend payouts viz.; over 70 per cent of profits are distributed as dividends.

Investment rationale

The per capita consumption as well as percentage of people who brush twice a day, is very low in India, as compared to its peers in Asia, forget the developed nations. The rise in disposable incomes and increased oral health awareness will ensure that the per capita consumption will only rise in the future. And Colgate will emerge as a key beneficiary of this trend.

Dominant market shares across categories, investments in brands, pricing power and consistent innovation of new products (backed by its strong sense of customer needs) only suggest that Colgate should grow at healthy rates in future.

Strong rural offtake and consumers upgrading from traditional methods of neem twigs, ash, salt etc., should provide further boost to its financials in the long-run. At Rs 382, the stock trades at 19x and 16x its expected earnings for FY09 and FY10, respectively, and can deliver 18-20 per cent returns in the next 12 months.