Colgate: rising competition, high valuations to cap upsides

Analysts expect P&G to target regular segment which contributes about 50% to Colgate's revenue; other players have a highly diversified business portfolio

Post reports of Procter and Gamble (P&G) planning to enter the Indian toothpaste market through its Oral-B brand in June, Colgate’s stock has fallen by 5% to Rs 1,419 as against flattish FMCG and Sensex on fears that the company may see its toothpaste market share decline.

P&G's entry will not only increase competition, but most likely compel incumbents such as Colgate (estimated market share of 51%), HUL (22%), Dabur (14%) and GSK Consumer to up their promotional and advertising activities, and in turn impact their profitability. Most analysts expect P&G to launch its toothpaste under the Oral-B brand and not the Crest brand, given the huge investments it has made in the former brand in the recent years.

Analysts expect P&G to target the regular segment which contributes about 50% to Colgate's revenue; other players have a highly diversified business portfolio. The fears appear to be overdone given Colgate's strong position and past track record.

Colgate has a robust distribution network (5 million outlets), which will be a significant hurdle for P&G. Notably, P&G's distribution network is even smaller than that of HUL and Dabur, making it difficult for P&G to capture a sizeable share of the mass market.

Colgate also has strong dentist prescriptions and while P&G is already aggressively improving this channel, it may take time to attain scale. However, P&G can push its products via chemists channel and thus buy time to build a larger reach.

P&G is a key competitor for Colgate globally, and Colgate has been able to protect its market share earlier as well - though at the cost of margins in the interim.

"When P&G entered the toothpaste market in Brazil in 2009, Colgate did not lose much market share but had to significantly increase advertising and trade spends to protect their turf. We expect a similar situation in India," says Arnab Mitra, FMCG analyst at Credit Suisse. Colgate obviously will be taking measures to protect its turf in India.

“Adopting a one-sided stance that Colgate will lose significant share is probably incorrect, as one has to watch how it counters market developments,” noted Citi’s analysts in a March 20th report.

What’s more, India’s toothpaste consumption levels are less than half that in China, which means scope for market expansion. The recent decline in raw material prices may also help partially offset a possible increase in ad expenses for incumbents.

Overall, while analysts aren’t majorly worried about the new competition, they believe the same along with Colgate's rich valuations (PE of 32 times FY14 estimated earnings) leave no room for error for the stock, which is up 9.3% against Sensex's 3.3% in the last three months.