Colgate investors may smile again on likely turnaround in toothpaste biz

Some recent reports by brokerages indicate an improvement in the company's market share, led by volume recovery

The loss of market share in the toothpaste business in the past couple of years because of competitive intensity has been a major worry for Colgate-Palmolive (India)’s investors. And, the same is also palpable in its stock performance. 

Colgate's share price is down nearly 8 per cent over a year, twice the fall in Nifty FMCG index during the same period. But, the scenario seems to be turning around for Colgate, and this may provide relief to its investors.

The Street’s negative reaction over the past year to Colgate’s continuous decline in the toothpaste market share (down around 400 basis points in three years until June 2019, after which Colgate has not provided the details) was justified given that 85 per cent of the toothpaste market leader’s revenue came from this segment. However, some recent reports by brokerages point towards an improvement in the company's market share, led by volume recovery.

According to Sharekhan’s recent report, “The company has maintained the leadership position in the toothpaste category with a 52 per cent market share, and Colgate believes  it has gained market share amid the pandemic due to a better supply chain.”

Nomura’s note, based on its interaction with the company’s management, underlines that Colgate’s volumes have improved sequentially and the toothpaste major is growing faster than the industry. Volumes in the toothbrush segment are also recovering.

Both these brokerages have a ‘buy/positive’ rating on the stock, which has gained over 6 per cent in the past three trading sessions compared to about 2 per cent rise in the Nifty FMCG index. Yet, analysts at Nomura foresee over 14 per cent upside in Colgate even from the current levels. Analysts believe Colgate’s improved thrust on expanding its distribution, mainly in rural areas under the new leadership, along with its new launches, will help it reap the benefits of improving oral care habits in the country amid the pandemic. This should further be supported by benign input cost in the near term. 

Competitive intensity from players like Dabur and Hindustan Unilever cannot be ignored, and developments on this front will be crucial to sustaining Colgate’s market share recovery. “Sustaining the improvement in the toothpaste market share will be a key trigger for the Colgate stock’s rerating going ahead,” say analysts at Sharekhan.

The stock is currently trading around 41-42x its FY22 estimated earnings, which is at a sharp discount to many other FMCG players.