Colgate's outperformance depends on volume recovery, premiumisation

The Colgate-Palmolive (India) share recently hit a record high, which could be a sign that the Fast-moving consumer goods (FMCG) major is moving into a new trajectory after being overlooked by investors for several years. The management says accelerated marketing spending on creating awareness has facilitated the frequency of usage in urban pockets, aiding gradual volume recovery. Although per capita toothpaste consumption remains at around 200 gm, Colgate is banking on a major shift in socio-economic composition to drive premiumisation with the target of the 13 million plus who earn over $500 equivalent per month.

It is looking at science-backed premium new product development, plus enhancing the freshness and therapeutics segment with amplified spending and product diversification under the Palmolive brand. Urban consumers replace toothbrushes in six months and rural in 15 months, but 78 per cent of the category remains below the $0.5 benchmark. The average urban consumer spends Rs 4/month on toothbrushes while rural consumers spend Rs 1.3/ month. A small improvement could mean a growth runway. Rural demand remains a key concern but general elections spending and freebies may revive consumer demand from Q2FY25 onwards, and real rural wages are now positive.

Colgate has initiated a massive distribution drive with the Colgate dental cream in Rs 10 and Rs 20 packs to increase toothpaste penetration in under-served central India and UP markets. Raw material costs are benign but Colgate has tried price hikes and expects stronger operating margins. Management says toothpaste product prices are lower compared to global markets. Rising competition in the toothpaste and toothbrush category may push advertising and promotional spending to 15 per cent of sales. But cost optimisation and the premiumisation may enable Colgate to retain operating profit margins of 32-33 per cent in FY25.

The company’s strategy involves category development by driving awareness and an attempt to push the frequency of consumption, alongside a diversified product mix and deeper rural penetration. The key risks include weakness in demand leading to a decline in volume or rising raw material inflation hitting margins.

Colgate hopes to outpace industry growth which is a tall ask given that it is 3 times the size of the next largest toothpaste brand and 1.4 times the next toothbrush brand. Whitening toothpaste is about one–fourth of the global toothpaste industry but just 1 per cent of the Indian market. This offers headroom and Colgate is trying to tap this category with Visible White.

The management says growth in the Palmolive business is likely to surpass oral care growth with Palmolive’s focus being premium body and hand wash. Colgate sees e-commerce, which now contributes 5 per cent of revenue, as a key focus area. Colgate is working towards creating a personal care brand under ‘Palmolive’. The personal care category, particularly body wash, has current penetration of just 2 per cent.

Consumer options in oral hygiene include science-based, Ayurveda, or naturals. Consumers who were buying naturals or ayurveda have plateaued and Colgate, with its science-based focus, could grab market share if it convinces some consumers to opt for a switch. The stock has risen by around 36 per cent in the last six months. Analyst and investor interest has returned.