After underperforming on the volume front and losing market share over the past few quarters, Colgate-Palmolive is expected to recover some of the volumes on the back of new launches, price cuts and uptick in rural demand. The company has lost about 400-basis point market share in the toothpaste category over the past two years, to 54 per cent, on account of minimal presence in the naturals segment as well as stiff competition from early entrants Patanjali and Dabur. Analysts at Motilal Oswal Securities said the sequential trends indicate a gradual stabilisation in the market share of Colgate, the leader in India's toothpaste industry.
As Colgate starts making inroads into the naturals segment, it should help the company get back on the growth path. The launch of Colgate Swarna Vedshakti, the second brand under the Vedshakti portfolio, coupled with a slew of launches to be rolled out will help the company emerge as a strong player in the herbal/naturals/ayurvedic sub-segment. These segments now form about 25 per cent of the overall toothpaste market. The naturals toothpaste market is the fastest growing segment, and is expected to account for about 30 per cent of the toothpaste market by the end of FY18.
The other trigger is the momentum from the recovery in the rural segment, where the company has a stronger presence than competitors such as Hindustan Unilever and Patanjali. Barring the slowdown between FY14 and FY17 due to poor monsoons and demonetisation, the company has reported strong double-digit growth led by rural volumes. Government policies aimed at boosting the rural economy and incomes, coupled with normal monsoons are expected to boost consumption of oral care products.
Nomura analysts, in a recent report, indicated a sustained increase in oral care category growth and said its growth rates will go higher as rural consumption increases. “We expect Colgate to be a key beneficiary of this uptick, given its focus on rural distribution and recent measures to counter fresh competition,” said the analysts.
The doubling of the stores in rural areas under direct coverage over the past five years and any demand improvement is expected to rub off on toothpaste as well as toothbrushes where Colgate's market share at 45.5 per cent has been stable.
Having said that, the going may not be as easy as it appears. Analysts at IIFL said the company could lose out on the premiumisation, given the increased focus on the naturals segment where it has been a late entrant compared to Dabur and Patanjali. They said the focus for the two players is volume market share rather than premiumisation and this, coupled with the fact that the company will have to make significant brand and marketing investments, could have an impact on Colgate’s operating profit.
For now, at the current price, the stock is trading at 38 times its FY19 estimates. Investors should wait for cues on volume growth and profitability to make further investments. A revival in these could help the stock reverse the underperformance seen since around September.