SECTOR UPDATE TOOTH PASTE P&G’s likely toothpaste foray creates ripples
India Equity Research | Consumer Goods Colgate, which has dominated the Indian toothpaste market for many years, continues to grow well ahead of market. In the medium term, it might however face new competition from Procter & Gamble (P&G) that is likely to enter the toothpaste category in India (speculated for many years now) via its Oral‐B (most likely) or Crest brands. P&G has done well in toothbrush segment and looks well placed to enter toothpaste as well. Colgate too seems to have increased its aggression by roping in a slew of brand ambassadors like Tennis star Mahesh Bhupathi, actor Rahul Bose and actress Anushka Sharma. Overall, we expect Colgate to largely maintain its market share (globally it has 3x market share of the next player and has outperformed competition in oral care in emerging markets like Brazil, Russia, China and Mexico; we expect P&G to gain share from players other than Colgate). Consequently, Colgate India’s ad spends could shoot up while pricing power could take a knock, leading to downside risk to earnings. Competition in the domestic market could however de‐rate the Colgate stock if P&G enters. For the other two toothpaste players, HUL and Dabur, oral care is a smaller segment of overall business. P&G’s aggression in toothbrush signals entry into toothpaste Colgate has lost market share by ~300 basis points in the past two years (recently it has stabilized) in the toothbrush category to P&G’s Oral‐B. This clearly shows the aggressive approach of P&G to gain more footholds in the country. The company also launched a promotional event, ‘The Oral‐B Smile India Movement 2’, and Madhuri Dixit promoted the event as ‘the Chief Smile Officer’. It plans to invest INR10bn in manufacturing and distribution network across product line in the next two years and it has repeatedly said that it wants to increase focus on India. This, in our view, could be an indication to the possible entry into the toothpaste category through Oral‐B. Colgate fit to compete; been there, done that Colgate’s strong distribution network, almost generic brand and huge customer acquisition initiatives provide high entry barriers to new entrants. The company is in the process of setting up a new toothpaste manufacturing facility in Gujarat; it has paid INR426mn towards the allotment of leasehold land and the estimated investment is INR2bn. The sensitive toothpaste segment has been growing at a very high rate (over a low base) and is likely to be a significant category of the total toothpaste market in the next three to five years. Also, the mouthwash category is doing well. However Colgate likely to de‐rate if P&G enters We continue to like Colgate’s continued focus on innovation, market stronghold and building brand equity. However, if P&G enters toothpaste category, we believe Colgate could de‐rate as ad spends could rise and price hike will be tough.
Edelweiss Research is also available on www.edelresearch.com, 1 Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Abneesh Roy +91 22 6620 3141 [email protected] Harsh Mehta +91 22 4063 5543 [email protected] April 12, 2012 Edelweiss Securities Limited Consumer Goods Colgate continues to do well in an exciting category We believe Colgate is best positioned to benefit from the increasing rural penetration in the oral care category. At present the rural penetration of toothpaste is a mere 45% against the urban levels of 89%. Colgate has taken various initiatives in several villages to bring awareness within the rural households, which would drive sales. In urban India, almost all toothpaste companies are employing strategies to encourage consumers to brush twice a day in view of increasing the per capita consumption of toothpaste. India’s per capita consumption is almost 1/4th of that of the US and less than half of that of other emerging markets. This provides an opportunity for growth for players like Colgate, HUL, and Dabur. Chart 1: Per capita consumption of toothpaste in India is low 651
(gms/year)
541
431
321
211
101
USA
China
Malaysia
Philippines
India
Source: Company, Edelweiss research Chart 2: Penetration of toothpaste and toothpowder in India 99.0
83.2
(%)
67.4
51.6
35.8
Dentifrice
Toothpaste
Toothpowder
CY10
CY09
CY08
CY07
CY06
CY05
CY04
CY03
CY02
CY01
CY00
20.0
Source: Company, Edelweiss research 2 Edelweiss Securities Limited Sector Update
Sensitive toothpaste category to grow sharply Rising awareness among consumers has made the sensitive toothpaste category a highly attractive segment to operate in. The sensitive toothpaste segment has been growing at a very high rate (over a low base) and is likely to be a significantly large category of the total toothpaste market in the next three to five years. In view of this, GSK Consumer (GSK) launched Sensodyne, a toothpaste for sensitive teeth. Sensodyne will take on the market leader Colgate, which already has a product in this segment – Colgate Sensitive. Fig. 1: GSK Consumer launched Sensodyne in India Fig. 2: Colgate Sensitive Pro Relief Source: Company, Edelweiss research P&G likely to enter Indian toothpaste category P&G is focusing on its strategy 'Project 2‐3‐4,' aimed at doubling the number of Indians who use its products, trebling per capita spending by Indians on its products and quadrupling net sales of its India operations by 2015. It also roped in Bollywood actress Madhuri Dixit for an advertisement campaign for its toothbrush brand Oral‐B. The company also launched a promotional event, ‘The Oral‐B Smile India Movement 2’, and Madhuri Dixit promoted the event as ‘the Chief Smile Officer’. Further, the company (global) has announced its plan to reduce costs by USD10bn by 2016 and invest more in the emerging markets. It is set to invest almost INR10bn in India by FY13 in manufacturing facilities and distribution network. This may provide the company to venture into the toothpaste category through its Oral‐B (most likely) or Crest brands, both P&G‐owned toothpaste brands internationally. The company is encouraged by its financial performance in Nigeria which was primarily led by its recent expansions in the toothpaste category. 3 Edelweiss Securities Limited Consumer Goods Fig. 3: Madhuri Dixit recently featured for Oral‐B Source: Company, Edelweiss research P&G has done well in Toothbrush Of late, Colgate has lost market share by 300 basis points in the past 2‐3 years in the toothbrush category (recently it has stabilized) to P&G’s Oral‐B. This clearly shows the aggressive approach of P&G to gain more footholds in the country. This in our view could also be an indication to the possible entry into the toothpaste category through Oral‐B, which is a well establishes brand in India. However, P&G is currently present in categories like detergents and beauty creams. Colgate, on the other hand, is single mindedly focused on oral care and has been growing faster than competition (~15% YoY volume growth in Q3FY12 while Dabur reported ~3% volume growth and HUL reported flat growth in the same period). We, therefore, see Colgate well placed to face competition from P&G or other local players. Colgate has upped the ante in past few months Apart from roping in Tennis star Mahesh Bhupathi and actor Rahul Bose as brand ambassadors, Colgate recently signed Bollywood actress Anushka as a brand ambassador for its toothpaste. It also roped in Allu Arjun as the new brand ambassador for Colgate MaxFresh in a strategy which is aimed at targeting the youth. The company is in the process of setting up a new toothpaste manufacturing facility in Gujarat; it has paid INR426mn towards the allotment of leasehold land and the estimated investment is INR2bn. In line with its sustained focus on innovation and to arrest market share loss in toothbrush, Colgate launched Colgate 360°Sonic Power and Colgate ZigZag Anti‐Germ toothbrushes in Q3FY12. We believe that continued focus on innovation, market stronghold and building brand equity will help Colgate maintain its market share. 4 Edelweiss Securities Limited Sector Update
Colgate’s strong distribution network, almost generic brand and huge customer acquisition initiatives will provide high entry barriers to new entrants. As a testament of its continuous investment in brand building, Colgate achieved The Guinness World Records in November 2010 by providing dental check‐ups to 66,322 children across multiple locations involving 33 schools in five cities across India. And they achieved The Guinness World Records in January 2011 for a mouthwash event organized by the company. Colgate has developed robust IT infrastructure and can gather information of ~1 mn outlets from its corporate offices. Fig. 4: Colgate’s toothpaste market share in India Source: Company, Edelweiss research Fig. 5: Brand ambassadors Rahul Bose and Mahesh Bhupathi Source: Company 5 Edelweiss Securities Limited Consumer Goods Fig. 6: Recently signed brand ambassadors Anushka and Allu Arjun Source: Company What happened in other countries… Colgate: Fit to compete: Been there, done that Colgate could face tough competition in the toothpaste category with the likely entry of new players like P&G. In the past, however, company has been very aggressive in capturing market share from competition, be it developing markets like Brazil, Mexico and China, or developed markets like US; it has managed to beat other global players. Also, strong distribution network, iconic brand (almost generic to category) and huge customer acquisition initiatives will provide high entry barriers to new entrants. Through various innovative techniques and a strong distribution network, Colgate has been able to improve its global market share in both toothpaste and toothbrush categories over the past decade. The company has become a strong No. 1 in the toothbrush category from the second position in just five years. We have seen that with the entry of new players, Colgate has more or less retained market share while the new player gaining market share from the No. 2 player (HUL in case of India). Currently, the company is well placed across the globe with over three times the market share of its nearest competitor. Fig. 7: Colgate is the global leader in toothpaste and toothbrush categories Source: Company, Edelweiss research 6 Edelweiss Securities Limited Sector Update
Latin America: In Brazil, P&G launched Crest toothpaste in 2006 to counter toothpaste giant Colgate. While P&G managed to gain ~5.3% market share in four years, Colgate continued to gain market share at the cost of second biggest competitor and other private labels. Its strong leadership in Mexico continues despite emergence of private labels. The new product ‘Colgate Luminous White’ in the oral care category has performed extremely well. Market share in Mexico has remained stable over the past few years, but the company has quite a few new products in pipeline which would be launched in this calendar year. Fig. 8: Toothpaste market share in Brazil and Mexico Source: Company, Edelweiss research Russia and China: In Russia, Colgate surpassed its nearest competitor in 2005 and has maintained its leadership ever since. It has managed to gain market share at the expense of the No. 2 player. Its leadership continues in China, whereas competitors have lost market share aided by new product launches. The company has a robust line‐up of new products for CY12 and expects a strong volume growth from these regions. Fig. 9: Toothpaste market share in Russia and China Source: Company, Edelweiss research 7 Edelweiss Securities Limited Consumer Goods U.S.: Unlike other US consumer companies, Colgate was strong in international markets and weak in the US, until it decided to focus on core oral care portfolio and take the leading competitors (P&G and Unilever) head‐on in 1994. Colgate closed plants, reorganised supply chain, implemented SAP software and invested in neglected brands, including Colgate toothpaste. In a stagnant USD1.5bn US toothpaste market, Colgate's share climbed from 21.3% in 1994 to 26.2% 1997, according to A.C. Nielsen. During the same period, P&G's market share fell from 31.6% to 25.3%. The company’s continuous innovation has paid off as it reported positive volume and price growth in this market for the first time in over two years in CY11. This can clearly be seen with the market share gap increasing comparedwith its nearest rival. Fig. 10: Colgate market share in U.S. Source: Company, Edelweiss research Colgate could, however, de‐rate in near term as ad spends could rise and price hike will be tough with P&G’s likely entry into toothpaste. HUL is unlikely to be much affected since toothpaste contributes only ~4% to its revenues. And as seen in past, P&G tends to focus only at one category line at one time, thereby we believe P&G’s focus on toothpaste is likely to be benefit HUL in the soaps and detergents category. 8 Edelweiss Securities Limited 9 HUL
240 Edelweiss Securities Limited Apr‐12
Oct‐11
Apr‐11
Oct‐10
Apr‐10
Oct‐09
Apr‐09
480 Apr‐12
Oct‐11
Apr‐11
Oct‐10
Apr‐10
Oct‐09
140
Oct‐08
Apr‐09
Oct‐08
Apr‐08
Oct‐07
Apr‐07
(x)
Apr‐12
Oct‐11
Apr‐11
Oct‐10
Apr‐10
Oct‐09
Apr‐09
Oct‐08
Apr‐08
Oct‐07
Apr‐07
Oct‐06
Apr‐06
Oct‐05
Apr‐05
(x)
Chart 3: P/E Band 1,250 Apr‐08
Oct‐07
Apr‐07
Oct‐06
Apr‐06
Oct‐05
Apr‐05
(x)
Sector Update
Colgate
30x
1,000 25x
750 20x
500 15x
10x
250 5x
0 Dabur
30x
112
25x
84
20x
56
15x
10x
28
5x
0
35x
400 30x
320 25x
20x
15x
160 80 Source: Edelweiss research Consumer Goods Table 1: Valuation Snapshot Company
Market
Diluted EPS (INR)
Mcap
Price (INR) (INR bn) FY12E FY13E FY14E
CAGR
Div yield
(%) FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY14E FY12E‐14E
P/E( x)
FY12E
EV/EBITDA(x)
ROE (%)
Consumer Goods
Asian Paints
3,237
310
96.1 110.4 133.8 33.7
29.3
24.2
21.1
18.0
14.8
38.0
1.9
18.0
Colgate
1,118
152
32.2
37.8
44.1 34.8
29.6
25.4
25.1
21.0
17.9 104.4 103.8 102.4
2.8
17.0
Dabur
106
184
3.6
4.3
5.4 29.6
24.3
19.7
21.0
17.2
13.9
42.3
40.3
39.4
1.8
22.6
Emami
430
65
17.2
20.1
24.3 25.0
21.4
17.7
22.6
18.1
14.4
36.3
39.0
41.9
2.0
18.9
GSK Consumer*
2,776
117
84.5 100.8 119.2 32.9
27.5
23.3
20.7
17.1
14.2
34.6
34.3
33.8
1.7
18.8
Godrej Consumer 493
168
16.4
20.5
24.6 30.0
24.1
20.1
22.2
18.1
15.1
27.6
28.4
28.7
1.7
22.3
Hindustan Unilever 417
900
12.0
14.0
16.4 34.7
29.8
25.4
28.6
24.3
20.4
83.6
77.2
73.0
2.4
16.9
37.2
ITC
230
1778
7.9
9.0
10.5 29.3
25.4
22.0
19.8
17.2
14.9
35.6
37.1
38.5
2.7
15.4
Marico
172
106
5.2
6.5
7.8 33.1
26.6
21.9
22.4
17.9
14.4
30.5
29.6
28.3
0.7
22.9
Nestle*
4,867
469
99.7 121.9 145.0 48.8
39.9
33.6
30.6
25.2
20.6
90.3
81.0
76.0
1.8
20.6
United Spirits
717
90
30.6
18.6
14.5
12.1
10.6
9.1
9.0
10.6
12.6
2.1
27.0
38.6
49.4 23.4
Consumer Goods ‐ Mean
32.3x
27.0x
22.4x
18.6x
48.4
47.1
2.0
20.0
Consumer Goods ‐ Mean (market cap wtd average)
33.1x
28.1x
23.2x
19.7x
53.4
51.5
2.3
17.7
Consumer Goods ‐ Mean (ex‐Nestle)
30.6x
25.7x
21.6x
17.9x
44.2
43.8
2.0
20.0
Prices on 11‐Apr‐12
38.5
* CY numbers
10 Edelweiss Securities Limited Sector Update
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: [email protected] VikasKhemani Head Institutional Equities [email protected] +91 22 2286 4206 Nischal Maheshwari Co‐Head Institutional Equities & Head Research [email protected] +91 22 6623 3411 Coverage group(s) of stocks by primary analyst(s): Consumer Goods
Asian Paints, Colgate, Dabur, Godrej Consumer, Emami, Hindustan Unilever, ITC, Marico, Nestle Ltd, GlaxoSmithKline Consumer Healthcare, United Spirits Recent Research Date 1,150
(INR)
950
750
Buy
550
Company
Title
Price (INR)
Recos
04‐Apr‐12 HUL
Beauty stores pact with RIL; EdelFlash 404
Buy
26‐Mar‐12 HUL
Focus on high growth categories; Visit Note 403
Buy
23‐Mar‐12 GCPL
Buy
Buy
Exporting growth; Visit Note 483
Buy
350
J ul-08
Aug-08
Se p-08
Oc t-08
Nov-08
De c -08
J a n-09
Fe b-09
Ma r-09
Apr-09
May-09
J un-09
J ul-09
150
Distribution of Ratings / Market Cap Rating Interpretation Edelweiss Research Coverage Universe Buy
Hold
Reduce
Rating
Total
Expected to
Rating Distribution* * 1 stocks under review 104 > 50bn
Market Cap (INR) 114 60 18 183
Between 10bn and 50 bn
< 10bn
58 11
Buy appreciate more than 15% over a 12‐month period Hold appreciate up to 15% over a 12‐month period Reduce
depreciate more than 5% over a 12‐month period
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