Not Smiling Time

Colgate is unlikely to maintain its past financial track record on account of increased financial competition in its key business and its inability to broaden the base of its earnings stream.

The company's dominance in oral care is being increasingly threatened by Hindustan Lever Ltd, which has cornered a third of the toothpaste market. Colgate is the market leader in toothpastes with a 60 per cent share of which, Colgate Dental Cream, the flagship brand, alone accounts for 48 per cent.

The toothbrush market is estimated at 400 million units per annum. Small local manufacturers account for about a third of the market.

 

Other major players include Hindustan Lever with Pepsodent and Close Up (15 per cent share), Geoffrey Manners with Forhans (5 per cent), Parle Products with Prudent (3 per cent -- now acquired by Gillette Diversified Operations) and Gillette Diversified with Oral B (4 per cent).

Competitive advantage: Colgate is the leading player in oral care, with its flagship brand Colgate Dental Cream among the best-known brands in India -- all its major oral care products have been launched under the Colgate name to capitalise on the established name. Colgate has a well-established distribution network with over 2000 distributors and 800,000 direct reach outlets. As toothpowders are an intermediate step between traditional cleansers and toothpaste, Colgate's presence in powders ensures the company the potential to capture a large proportion of new users.

The Cibaca acquisition: In financial year 1995, Colgate bought Hindustan Ciba Geigy's Cibaca division for Rs 131 crore, mainly financed by the sale of investments and operating cash flow. The incremental returns on this acquisition being far lower than Colgate's business, return on equity and return on capital employed fell steadily over the period 1994-96.

The HLL threat: Hindustan Lever's increasing presence in the oral care segment is a major threat to Colgate, which is overly dependent on this category, in particular toothpaste. Close-up has taken market share from Colgate Dental Cream in urban markets, which Colgate has been unable to recoup through Colgate Gel. Also,Hindustan Lever's deeper pockets and wider presence in rural areas will give the company an edge.

Attempts to Diversify: Hindustan Lever's rapidly increasing presence in oral care has led Colgate to rethink its strategy. It has increased its presence in hair care and entered other new areas such as toilet soaps and dish-washing products. While Optima has been highly successful, the company has not reaped real returns on its investment in toilet soaps. It is difficult to ascertain whether it will gain a firm foothold with Axion, its dish washing product, as distribution is currently restricted to Mumbai.

Appears expensive: With PER at 45.7 times FY1997E and 35.6x FY1998E, Colgate is the most expensive consumer non-durable company in the SBCW universe. Given the company's competitive market and its valuation relative to other consumer product companies, we advise investors to Sell.