Having been on the receiving end of the market share battle in the oral care segment over the last two years and subsequent underperformance of its stock on the bourses, brokerages are turning positive on Colgate as the company is implementing strategies to win back market share. Among measures the company has adopted are distribution expansion, strengthening of its naturals portfolio and new product category introductions to improve overall revenues.
On the distribution front, the company is planning to increase its direct reach by 15 per cent in the countryside over the next one year to benefit from the uptick in the rural economy. In addition to this, the wholesale channel, which accounts for half of the distribution mix for the company, is stabilising after facing significant disruption during transition to the goods and services tax (GST) regime. This had impacted sales of its stronger brands earlier.
Normalising of trade coupled with distribution and marketing initiatives are expected to help bring stability to the company's market position. From a peak volume market share of 57.9 per cent for toothpaste market in Q1FY16, the company has lost 420 basis points. Analysts at ICICI Securities say that market share losses for Colgate have come down with good response to Swarna Vedshakti and Cibaca Vedshakti, toothpaste variants in the 'naturals' category, which have now been rolled out pan-India. These products have increased Colgate's overall toothpaste market share by one percentage point (100 basis point) in volume terms, they add.
What should also help drive overall revenues is the entry of the company into new product categories. Unlike its parent, which derives only 48 per cent of revenues from oral care, for Indian operations it is 95 per cent. The entry into a new category (personal care, pet care, home care) should help boost revenues, though margins in the initial period will be dilutive. Margins in the oral care business, however are expected to see some improvement in a couple of quarters on the back of volume growth and price hikes taken recently.
For the stock, valuations, which are currently lower than its three-year average, should improve. Analysts at HDFC Securities believe that most of the negatives are priced into the stock. With its toothpaste market share now at 2012 levels, they believe market share has now bottomed out and a re-rating of the stock is on the cards. The stock is trading at 35.5 times its FY19 earnings estimates.