Rings Of No Confidence

Intense competition in the oral care segment has seen Colgate's share of the market pie shrink. Colgate, however, still commands market shares the others would give their eye teeth for -- it leads the market with a 50 per cent share in toothpastes and 60 per cent in toothbrushes (post Cibaca acquisition). Though the scrip has not been mauled at the bourses in the last one year, it has been range bound, moving within a price band of Rs 220 to Rs 280 and is presently available at Rs 265, a P/E of 45. Other multinationals in the same line of business (fast moving consumer goods) like HLL, Procter & Gamble are trading at a P/E of 62.90 and 49.20. Does the company merit an investment?

 

No easy entry into Colgate's main business...

The personal products business poses strong entry barriers in the form of brand equity and distribution network. Market research shows that brand loyalties are particularly strong in toothpastes as consumers do not like to try unknown brands in small value personal product use. Marketmen add that it is very difficult for a new product to offer visibly better performance to induce brand switching. Dislodging established brands in such a market scenario is difficult to say the least.

Colgate has dominated the market for decades with some very strong brands in its oral care portfolio -- its main brand Colgate Dental Cream (CDC) and its variants Colgate Gel, Colgate Calciguard, Colgate Total and Colgate Fresh Stripes .A number of small brands like Promise, Babool and Vicco have built up small niche markets.

....Still Colgate is under threat...

Colgate's dominant position however is being threatened by marketing savvy and cash rich HLL, which has emerged as the number two player in the oral care business with a 32 per cent market share in 1997

(up from 24 per cent in 1995). HLL's Pepsodent and Close Up have eaten into Colgate's main brand, Colgate Dental Cream's market share. Colgate has lost nearly lost 8-9 per cent of its CDC market share

in the last 2-3 years to HLL. Commenting on the state of competition an industry analyst says, "Colgate's management has not brought out any innovative features over the years in its leading brand CDC to improve its market position and has been slow in responding to onslaught of competition."

This loss of market share is all the more significant for Colgate as it derives around 90 per cent of its turnover from the oral care segment. Further, in toothpastes, a major portion of the turnover is contributed by CDC its oldest brand. The rest largely comes from Colgate Gel, Colgate Calciguard and Colgate Total.

In the toothbrush segment, Colgate has a 60 per cent share contributed equally by the Colgate and Cibaca brands. Colgate's position in toothbrushes is a little less threatened than it is in toothpastes. It faces a threat from Smithkline Beecham's Aqufresh. The other players are in the unorganised sector.

Colgate's product portfolio in toilet soaps has two major brands Colgate Palmolive and Protex positioned in the premium segment. Competition is far too intense in the premium segment and its soap manufacturing facility is operating at a very low capacity. HLL is the dominant player by far in the soaps segment. Colgate's soaps business therefore faces the might of HLL even in this segment.

The sweepstakes for market share are high -- toothpastes are a Rs 850 crore business, toothpowders (concentrated in rural market) Rs 330 crore and toothbrushes Rs 250 crore. Toothbrush market has witnessed an accelerated growth during the last 2-3 years at over 10 per cent per year. Thus even a one per centage point loss in market share in say toothpastes translates to a loss in turnover of Rs 8.5 crore.

... and its performance has suffered...

With HLL putting the heat on Colgate, the latter has had to up its advertising -- the ad-to-sales ratio went up from 6 per cent in 1994-95 to 11.4 per cent in 1996-97. This was not enough to prevent a fall in its market share.

On the direct costs front, raw material as a per centage of sales fell from 61.9 per cent in 1992-93 to 59.5 per cent in 1997. This however was not enough to show good results -- for 1997-98 its total expenditure increased faster than sales at 7.44 per cent to Rs 814.96 crore; net sales improved by a meager 4.3 per cent to Rs 944.59 crore. Its net profit showed a negligible increase to Rs 79.87 crore against 78.92 crore last year. Its net profit margin fell 8.7 per cent to 8.4 per cent.

Can it guard its share of the pie?

This is going to be very difficult for Colgate as it lacks the cash muscle that HLL has. It spent a substantial amount of its cash (Rs 131 crore) in purchasing the oral care Cibaca brands in 1994. Since then, its cash cow CDC has been increasingly threatened and cash generation has suffered.

Also, HLL has a wider portfolio and a much better distribution. These are important advantages as the business is such that availability is often the most important determinant of success. Also any attempt to restrict its advertisement expenses would hurt its brand positioning. If the past be any proxy of the shape of things to come, Colgate may not be able to defend further erosion in market share.

Colgate's leadership position is under threat from HLL's aggression and its bottomline could be under pressure. It is therefore advisable to avoid the scrip at its current price as upward potential is limited to Rs 320, or if stretched, to a maximum of Rs 340. The scrip makes a good buy below Rs 210.

Technically speaking

The price of the Colgate-Palmolive scrip has declined from Rs 313 in October 1997 to Rs 257 this week. That is a loss of 18 per cent over a period when the Sensex lost 20 per cent. At current levels the scrip is encountering resistance at Rs 265 while it has support at Rs 249. So it is trading inside a very narrow range. At higher levels there is another resistance band at Rs 276 while there is support at Rs 240 further down.

In the intermediate term the scrip may trade inside the Rs 240-276 range. Trading volumes are quite high so there is the possibility of a breakout in either direction anytime. A breach of Rs 276 would set up a target of Rs 325 since the scrip would complete a bullish saucer and broken a crucial falling trendline.

The long term trend appears to have been down since August 1997 and the scrip recently breached important support to drop to a 5-year low below Rs 200 in June. Its rapid recovery may indicate that the worst is over.

If a falling trendline at approximately -29 degrees is dropped from the August 1997 top of Rs 382, that may be counted as a dynamic resistance. For the stock to see genuine trend-reversal, it must climb past that trendline on high volumes.