Colgate Palmolive - Looming competitive intensity - HDFC Securities

Colgate's dominance in Indian oral care market continues unabated thanks to 1) deep distribution network, 2) unparalleled brand salience 3) high pricing power, 4) continued innovation and premiumisation (leader of nascent categories: sensitive toothpaste and mouthwash) and 5) new capacities to meet rising demand (new plant @ Sanand and AP). However, likely to face higher competitive pressure from all quarters with HUL and Dabur having upped the ante and delayed but imminent entry of P&G in toothpaste category. At current valuations, trading at 32.3x FY14E (40% premium than 5-year avg), the stock does not offer any respite. Recommend UPF with TP of INR 1,300.

Domination in oral care market to continue

- The Colgate brand is almost synonymous with oral care products in India thanks to its deep distribution network (4.5 mn outlets) and effective marketing strategies along with focused market activity to increase toothpaste use. This has helped Colgate to grow its market share in Indian oral care market despite stiff competition.

- Its volume share in toothpaste increased by 200bps yoy to 54% in 2QFY13. Colgate also occupies a 26% share (by volume) of the nascent but fast-growing mouthwash category.

Competition is coming

- India boasts to be in top 10 developing market for P&G and too large an oral care market for P&G to ignore. As per Shantanu Khosla, MD at P&G India, P&G plans to bring the parent's entire portfolio to the country with the exception of toilet paper. Thereby we believe that sooner rather than later P&G will enter toothpaste category.

- HUL, in oral care category, has become more active which is evident from the entry into sensitive category (via Pepsodent extra protection range) and mouthwash. Also, Dabur has intensified its focus on toothpaste category.

Valuations does not provide respite

- We have experienced in the past that, HUL stock derated with the entry of P&G in detergent category.

- So despite our expectation that P&G will take share from No. 2 player and Colgate will retain its market share but there are heightened chances of disruptive pricing, increased A&P and would result in de-rating of the stock.

- Also, at current price the stock is trading at 32.3x FY14E (40% premium to 5-year avg). Recommend UPF on the stock with TP of 1,300 (25x FY15E).

Source : Equity Bulls

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