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The leader in the oral-care category is positioned to capitalise on underpenetrated market segments through strong brands

A 51% subsidiary of Colgate US, Colgate Palmolive (India) (CPIL) is a market leader in the Indian oralcare industry since decades. The company has products across variants and price points in toothpaste, toothpowder, and toothbrushes, and has leadership in each of these. CPIL’s two brands of toothpastes — Colgate and Cibaca — are targeted at the urban and rural markets, respectively.

CPIL’s toothpaste sales volume increased 11% and toothbrush 41% in the September 2008 quarter, expanding its overall market share to 37.7% in the January-August 2008 period. The company boosted the toothpowder market share to 48.6% in the January-August 2008 period. These increases were driven by tight focus on getting closer to consumers everywhere, strengthening partnerships with the dental profession and customers in the trade and fostering innovation in all areas of business. The launch of innovative products such as Colgate Active Salt, Colgate Maxfresh and Colgate 360° toothbrush also contributed to the growth of the market share.

Penetration of modern oral-care products below 55% is low in India as many people in rural India still clean their teeth with traditional products like twigs of neem tree, salt, ash, and other herbal items. Per capita consumption of toothpaste in India is among the lowest globally. While India’s per capita consumption of toothpaste is 92 grams, even countries like China and Malaysia consume much at 219 grams and 285 grams, respectively. Also, just 7% of the population here brushes twice a day as compared with 61% in China. Increasing awareness on the benefits of oral care and brushing twice daily would work in favour of CPIL.

In the current scenario of economic slowdown, there may be a reduction in demand for premium products and higher demand for value-for-money products. CPIL will be at a significant competitive advantage as it has one of the strongest brands in the lower priced toothpaste segment. The company has improved its presence in the value-for-money segment through an increase in market share of Cibaca from 5% in the year ended March 2005 (FY 2005) to 7.3% in FY 2008.

The markets for advanced oral products like mouth wash, dental floss and teeth whitening products are at a nascent stage in India. These products find limited usage with consumer concentration in urban areas. CPIL caters to these products and has an upper hand in the development of this market as they evolve in future. The company has also made attempts to widen its product basket through entry into shower gels and body washes and has been steadily expanding its offerings in the Palmolive Naturals as well as Palmolive Thermal Spa range.

To make effective use of capital, address overcapitalisation and reward shareholders, CPIL cut its share capital from Rs 136 crore to Rs 13.6 crore in the fiscal ended March 2008 (FY 2008). Though the number of shares outstanding and the shareholding structure have remained unchanged, this reduction has substantially improved the return ratios like return on capital employed (RoCE) and return on equity (RoE). RoCE spurted to 129.95% in FY 2008 from 90.01% in FY 2007. RoNW improved to 104.67% from 71.23%.

CPIL aims at margin gains through efficient supply-chain management and bringing down cost of operations. It has expanded its Baddi (tax-efficient zone), Himachal Pradesh, capacity to 66,000 tonnes in FY 2009 from 40,000 tonnes in FY 2007. This plant enjoys excise and income-tax exemption. These benefits will boost margin.

With most commodity prices falling, CPIL’s raw material, packing and transport costs will also come down, helping it to increase margin as also expand ad budgets to boost volume growth.

Net sales increased 16% to Rs 863.06 crore in the half year ended September 2008. Operating profit margin declined 96 basis points to 18.9% and operating profit grew 10% to Rs 162.95 crore. Total tax outgo fell 11% to Rs 28 crore, which lifted net profit 17% to Rs 135.40 crore.

We expect CPIL to register EPS of Rs 19.7 in FY 2009. The share price trades at Rs 405. P/E is 20.6.

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