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Colgate-Palmolive (India) COMPANY UPDATE 12 MAR 2018 Colgate-Palmolive (India) BUY INDUSTRY FMCG End of market share bloodbath? CMP (as on 12 Mar 2018) Rs 1,044 We met the management of Colgate-Palmolive India years prior to Patanjali’s entry. However, they (Colgate) to discuss (1) Recovery in the oral care underestimated the scope of naturals and hence Target Price Rs 1,204 market (2) Analysing Colgate’s market share losses in weren’t too gung-ho about it. With Patanjali’s entry, the naturals space in the oral market blew up from Nifty 10,421 toothpaste and toothbrush (3) Colgate’s counter <10% to 25% share. Sensex 33,918 strategy to stabilize and regain market share (4) Health of the trade channels (5) Scope of entering . KEY STOCK DATA Change in consumer perception to Ayurvedic: new categories (pollination of global products). Naturals/Ayurvedic did well not because of pricing or Bloomberg CLGT IN Recap of 3QFY18 results: Colgate’s 3QFY18 volume quality of product but primarily change in consumer No. of Shares (mn) 272 growth of 12% (12% decline in 3QFY17) was it’s perception from scientific products to ayurvedic. MCap (Rs bn)/(US$ mn) 282/4,367 fastest in the last 12 quarters. However, volume Colgate and HUL lost significant market share in North 6 m avg traded value (Rs mn) 330 growth was below the street and our expectation and East India owing to stronger change in consumer STOCK PERFORMANCE (%) (13.5%). As a result the stock corrected by 8% post perception in these markets (Baba Ramdev’s home turf). 52 Week high / low Rs 1,178/947 the result. Colgate posted revenue/EBITDA/APAT of 3M 6M 12M 5/15/11% YoY during 9MFY18. Unfortunate with Cibaca Vedshakti’s launch: Colgate Absolute (%) (2.2) (9.8) 10.3 Key takeaways of the meeting launched Cibaca Vedshakti to take on Patanjali’s Dant Relative (%) (4.2) (15.3) (6.8) Kati in Oct’16. However, the industry was hit by (1) Recovery in the oral care market: As per the mgt. the demonet, followed by GST. Therefore the product did SHAREHOLDING PATTERN (%) oral care market (~Rs 100bn) has not yet reached its not get an opportunity to make a mark. Post GST Promoters 51.00 historical growth rates (single digit vs. low teens). Rural transition, Colgate decided to expand the Vedshakti FIs & Local MFs 12.61 used to grow 200-250bps faster than urban but is now brand with the launch of Swarna Vedshakti (premium FPIs 13.92 growing 100-150bps faster. Disruption in the trade product) in the South and West regions. Public & Others 22.47 channels is one of the key factors for this slowdown. Mgt is . Market share is now stabilizing: Since their peak Source : BSE optimistic for the recovery and expects the market to grow volume market share of 57.9% for toothpaste in at low teens during FY18-20E. Q1FY16, Colgate has lost 420bps of share (implying Naveen Trivedi (2) Analysing Colgate’s market share losses in toothpaste 42bps loss per quarter). Bulk of the market share losses [email protected] and toothbrush: were attributed from Colgate’s premium segment +91-22-6171-7324 (Colgate sensitive and Colgate Total). The premium . Did not attain competitive advantage by being the segment used to contribute ~8% vs. now at ~4%. Siddhant Chhabria first mover in ‘Naturals’: Colgate always believed [email protected] naturals had prospects in the oral space, hence it had a However their flagship segment i.e. ‘pure family’ and +91-22-6171-7336 presence through Active Salt (Neem and Lemon), few ‘freshness’ maintained market share. HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters COLGATE-PALMOLIVE : COMPANY UPDATE . According to the mgt., market share is now stabilizing Colgate’s Toothpaste Market Share Trend Toothpaste Per Capita Consumption (gms) and unlikely to fall further. Unlike the word on the (%) 800 603 street, the mgt denied softening of Patanjali’s 59.0 600 458 57.9 57.8 400 312 competitive intensity in oral care. However the co. 57.6 212 58.0 158 57.3 200 believes Dabur is a stronger competitor with good 57.0 56.7 55.9 0 products (Dabur Red and Babool) and strong 55.7 56.0 55.4 55.3 USA 55.1 India Brazil China distribution strategy. The co. also hasn’t seen any 55.0 54.3 Philipines impact with HUL’s Lever Ayush (naturals) launch, 54.0 54.0 53.7 Source: Colgate-Palmolive, HDFC sec Inst Research however they see HUL as a strong competitor in the 53.0 freshness space (HUL’s Closeup vs. Colgate’s MaxFresh) 52.0 51.0 Rural and Urban Penetration Toothpaste Market Breakup (~Rs 80bn) 100 92 74 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 80 Others, 17% 60 Source: Company, HDFC sec Inst Research 40 . 20 Patanjali, Toothbrush segment is stable: Although Colgate’s 0 11% market share in toothbrush is not at its peak (45.1% vs. Urban Rural Colgate, 47.4% in Q4FY17), the mgt. believes the toothbrush 54% Source: Colgate-Palmolive business is stable and should not read too much into market share numbers on a quarterly basis. P&G and Dabur, 12% Ajay (South region) are the other major players with 25% and 10% market share respectively. The mgt. stated that the brush business is a price game and HUL, 17% hence commands lower gross margins vs. toothpaste. However toothbrush requires lower marketing spend Source: Company, HDFC sec Inst Research and hence EBITDA margins are at par with toothpaste. Interestingly, retail margins for toothbrush are exorbitant at 25-30%. Page | 2 COLGATE-PALMOLIVE : COMPANY UPDATE Toothbrush Market Breakup (~Rs 20bn) (3) Colgate’s counter strategy to stabilize and regain Colgate’s launches in Naturals are in market share: the mid and mass segments MRP/ . Pan-India launch of Swarna Vedshakti: With Toothpastes Brands Others, 20% 100gm encouraging results from Swarna Vedshakti in South Sensodyne 131 and West regions (2-3% market share in some Colgate Sensitive Original 124 pockets), mgt now plans to launch it pan-India. The co. Patanjali Dant Kanti Advanced 90 Colgate, Colgate Total 71 45% is optimistic to capture market share in the Ayurvedic Ajay, 10% Colgate Max Fresh (Spicy fresh) 63 space going ahead. Lever Ayush 60 Colgate Max Fresh (Peppermint) 58 . Higher ASP Spend likely: Globally Colgate’s ad spends Colgate Swarna Vedshakti 55 are 9-10% of their revenues. However in India, Colgate Closeup Red Gel 48 spends 12-14%. The mgt. stated that the ad spend as a Meswak 47 Oral B, 25% percentage is higher in India owing to 1) Support Dabur Red 46 campaigns which help drive penetration (92% in urban Colgate Active Salt 45 Colgate Herbal 44 and 72% in rural) and 2) Oral care as a category Source: Company, HDFC sec Inst Research Pepsodent Germi Check 2in1 42 requires higher ad spending (higher oral care mix in Colgate Dental 40 Colgate’s Toothbrush Market Share Trend India vs. global). In the last few quarters, ad spend has Patanjali Dant Kanti Dental Cream 38 been closer to 12% (lower end of the range). The mgt. (%) Patanjali Dant Kanti Junior 35 stated that ad spend range will continue to be between Colgate Cibaca Vedshakti 31 48.0 47.4 47.0 46.8 12-14% with spikes in few quarters to support new Colgate Cibaca 25 47.0 46.6 45.8 Source: Retail 45.5 launches. We continue to model 13% ad spend during 46.0 45.1 45.0 45.0 FY18E-20E. 43.8 44.0 43.3 42.7 (4) Health of the trade channels: The mgt. stated that 43.0 42.1 42.0 their distribution mix has not changed significantly in the 41.0 last few quarters. Wholesale contributes ~50% of the mix 40.0 (higher than desired). As per the mgt wholesale as a 39.0 channel has seen the maximum disruption during GST transition and is now beginning to stabilize particularly for stronger brands. 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Source: Company, HDFC sec Inst Research Page | 3 COLGATE-PALMOLIVE : COMPANY UPDATE Colgate’s Distribution Channel Mix Colgate’s Global Brands Oral Care Brands Category CSD, 6% Colgate Total Oral Care MT, 12% Colgate 360 Oral Care Colgate MaxFresh Oral Care Colgate Optic White Oral Care Colgate Kids Oral Care Colgate Hydris Oral Care Wholesale , Colgate Enamel Health Oral Care 50% Colgate Sensitive Oral Care Personal Care Brands Category Direct Palmolive Body wash Reach, 32% Protex Body wash Sanex Deodorants and Body wash Soft Soap Hand and Body wash Gard Shampoo Source: Company, HDFC sec Inst Research Speed Stick Antiperspirants and Deodorants Colgate’s Global Revenue Mix Lady Speed Stick Antiperspirants and Deodorants Irish Spring Body Wash (5) Scope of entering new categories: Interestingly, Tom's of Maine (Naturals Oral care, Deodorants, Baby Care and Pet Colgate’s parent company derives only 48% of its total Nutrition PC products) Body & Lip care 15% revenues from Oral care. Its other categories like Personal Afta After shave care/Home care/ Pet nutrition derive 19/18/15%, Tahiti Body wash Home respectively. In India Colgate derives ~95% of their Tender care Baby care Oral Care Care 48% 18% revenues from oral care. The mgt. stated that most of their global categories are futuristic like body wash, liquid dish Home Care Brands Category Brite Fabric care wash, fabric conditioners etc. Suavitel Fabric Conditioners Personal Care When modern trade hit India, Colgate believed the time Murphy oil soap Wood cleaner 19% was right for these categories.
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