SECTORUPDATE

TOOTHPASTE
P&Gslikelytoothpasteforaycreatesripples
IndiaEquityResearch|ConsumerGoods

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 OralB (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 Indias 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 derate the Colgate stock if P&G enters. For the other two toothpaste players, HUL and Dabur, oral care is a smaller segment of overallbusiness.

P&Gsaggressionintoothbrushsignalsentryintotoothpaste
Colgatehaslostmarketshareby~300basispointsinthepasttwoyears(recentlyithas stabilized)inthetoothbrushcategorytoP&GsOralB.Thisclearlyshowstheaggressive approach of P&G to gain more footholds in the country. The company also launched a promotional event, The OralB Smile India Movement 2, and Madhuri Dixit promoted the event as the Chief Smile Officer. It plans to invest INR10bn in manufacturing and distributionnetworkacrossproductlineinthenexttwoyearsandithasrepeatedlysaid that it wants to increase focus on India. This, in our view, could be an indication to the possibleentryintothetoothpastecategorythroughOralB.

Colgatefittocompete;beenthere,donethat
Colgates strong distribution network, almost generic brand and huge customer acquisitioninitiativesprovidehighentrybarrierstonewentrants.Thecompanyisinthe 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 nextthreetofiveyears.Also,themouthwashcategoryisdoingwell.
AbneeshRoy
+912266203141 abneesh.roy@edelcap.com

HarshMehta
+912240635543 harsh.mehta@edelcap.com

HoweverColgatelikelytoderateifP&Genters
We continue to like Colgates continued focus on innovation, market stronghold and building brand equity. However, if P&G enters toothpaste category, we believe Colgate couldderateasadspendscouldriseandpricehikewillbetough.
EdelweissResearchisalsoavailableonwww.edelresearch.com, 1 BloombergEDEL<GO>,ThomsonFirstCall,ReutersandFactset.

April12,2012 EdelweissSecuritiesLimited

ConsumerGoods
Colgatecontinuestodowellinanexcitingcategory
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 awarenesswithintheruralhouseholds,whichwoulddrivesales. 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.Indiaspercapitaconsumptionisalmost1/4thofthatoftheUSandlessthanhalf of that of other emerging markets. This provides an opportunity for growth for players like Colgate,HUL,andDabur.

Chart1:PercapitaconsumptionoftoothpasteinIndiaislow 651
541

(gms/year)

431 321 211 101 USA China Malaysia Philippines India

Source:Company,Edelweissresearch

Chart2:PenetrationoftoothpasteandtoothpowderinIndia
99.0 83.2 67.4

(%)
51.6 35.8 20.0

CY00

CY01

CY02

CY03

CY04

CY05

CY06

CY07

CY08

CY09

Dentifrice

Toothpaste

Toothpowder

CY10

Source:Company,Edelweissresearch

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SectorUpdate
Sensitivetoothpastecategorytogrowsharply
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 leaderColgate,whichalreadyhasaproductinthissegmentColgateSensitive. Fig.1:GSKConsumerlaunchedSensodyneinIndia Fig.2:ColgateSensitiveProRelief

Source:Company,Edelweissresearch

P&GlikelytoenterIndiantoothpastecategory
P&G is focusing on its strategy 'Project 234,' aimed at doubling the number of Indians who use its products, trebling per capita spending by Indians on its products and quadrupling net salesofitsIndiaoperationsby2015. It also roped in Bollywood actress Madhuri Dixit for an advertisement campaign for its toothbrush brand OralB. Thecompany also launched a promotional event, The OralB Smile IndiaMovement2,andMadhuriDixitpromotedtheeventastheChiefSmileOfficer. 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 inmanufacturingfacilitiesanddistributionnetwork. This may provide the company to venture into the toothpaste category through its OralB (most likely) or Crest brands, both P&Gowned toothpaste brands internationally. The company is encouraged by its financial performance in Nigeria which was primarily led by its recentexpansionsinthetoothpastecategory.

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ConsumerGoods
Fig.3:MadhuriDixitrecentlyfeaturedforOralB

Source:Company,Edelweissresearch

P&GhasdonewellinToothbrush
Of late, Colgate has lost market share by 300 basis points in the past 23 years in the toothbrush category (recently it has stabilized) to P&Gs OralB. This clearly shows the aggressiveapproachofP&Gtogainmorefootholdsinthecountry.Thisinourviewcouldalso beanindicationtothepossibleentryintothetoothpastecategorythrough OralB,whichisa wellestablishesbrandinIndia. 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 facecompetitionfromP&Gorotherlocalplayers.

Colgatehasuppedtheanteinpastfewmonths
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 itstoothpaste.ItalsoropedinAlluArjunasthenewbrandambassadorforColgateMaxFresh inastrategywhichisaimedattargetingtheyouth. 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 360Sonic Power and Colgate ZigZag AntiGermtoothbrushesinQ3FY12. We believe that continued focus on innovation, market stronghold and building brand equity willhelpColgatemaintainitsmarketshare.
4 EdelweissSecuritiesLimited

SectorUpdate
Colgates strong distribution network, almost generic brand and huge customer acquisition initiativeswillprovidehighentrybarrierstonewentrants. As a testament of its continuous investment in brand building, Colgate achieved The Guinness World Records in November 2010 by providing dental checkups 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 fromitscorporateoffices.

Fig.4:ColgatestoothpastemarketshareinIndia

Source:Company,Edelweissresearch

Fig.5:BrandambassadorsRahulBoseandMaheshBhupathi

Source:Company

EdelweissSecuritiesLimited

ConsumerGoods
Fig.6:RecentlysignedbrandambassadorsAnushkaandAlluArjun

Source:Company

Whathappenedinothercountries
Colgate:Fittocompete:Beenthere,donethat 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 customeracquisitioninitiativeswillprovidehighentrybarrierstonewentrants. 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 thesecondpositioninjustfiveyears. We have seen that with the entry of new players, Colgate has more or less retained market sharewhilethenewplayergainingmarketsharefromtheNo.2player(HULincaseofIndia). Currently, the company is well placed across the globe with over three times the market shareofitsnearestcompetitor.

Fig.7:Colgateisthegloballeaderintoothpasteandtoothbrushcategories

Source:Company,Edelweissresearch
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SectorUpdate
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 fewnewproductsinpipelinewhichwouldbelaunchedinthiscalendaryear.

Fig.8:ToothpastemarketshareinBrazilandMexico

Source:Company,Edelweissresearch

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 bynew product launches. The company has a robust lineup of new products for CY12andexpectsastrongvolumegrowthfromtheseregions.

Fig.9:ToothpastemarketshareinRussiaandChina

Source:Company,Edelweissresearch

EdelweissSecuritiesLimited

ConsumerGoods
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) headon in 1994. Colgate closed plants, reorganised supply chain, implemented SAP software and invested in neglected brands, including Colgate toothpaste. InastagnantUSD1.5bnUStoothpastemarket,Colgate'sshareclimbedfrom21.3%in1994to 26.2% 1997, according to A.C. Nielsen. During the same period, P&G's market share fell from 31.6%to25.3%. The companys 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 withthemarketsharegapincreasingcomparedwithitsnearestrival.

Fig.10:ColgatemarketshareinU.S.

Source:Company,Edelweissresearch

Colgate could, however, derate in near term as ad spends could rise and price hike will be tough with P&Gs likely entry into toothpaste. HUL is unlikely to be much affected since toothpastecontributesonly~4%toitsrevenues.Andasseeninpast,P&Gtendstofocusonly atonecategorylineatonetime,therebywebelieveP&Gsfocusontoothpasteislikelytobe benefitHULinthesoapsanddetergentscategory.

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Dabur

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Source:Edelweissresearch

ConsumerGoods
Table1:ValuationSnapshot
Company Market Mcap DilutedEPS(INR) FY12E P/E(x) Price (INR) (INRbn) FY12E FY13E FY14E ConsumerGoods AsianPaints Colgate Dabur Emami GSKConsumer* Godrej Consumer 3,237 1,118 106 430 2,776 493 310 152 184 65 117 168 900 1778 106 469 90 96.1 110.4 133.8 33.7 32.2 3.6 17.2 37.8 4.3 20.1 44.1 34.8 5.4 29.6 24.3 25.0 29.3 29.6 24.3 21.4 27.5 24.1 29.8 25.4 26.6 39.9 18.6 27.0x 28.1x 25.7x 24.2 25.4 19.7 17.7 23.3 20.1 25.4 22.0 21.9 33.6 14.5 21.1 25.1 21.0 22.6 20.7 22.2 28.6 19.8 22.4 30.6 12.1 22.4x 23.2x 21.6x 18.0 21.0 17.2 18.1 17.1 18.1 24.3 17.2 17.9 25.2 10.6 18.6x 19.7x 17.9x 14.8 38.5 37.2 38.0 1.9 2.8 1.8 2.0 1.7 1.7 2.4 2.7 0.7 1.8 2.1 2.0 2.3 2.0 18.0 17.0 22.6 18.9 18.8 22.3 16.9 15.4 22.9 20.6 27.0 20.0 17.7 20.0 CAGR Div yield (%) FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY14E FY12E14E EV/EBITDA(x) ROE(%)

17.9 104.4 103.8 102.4 13.9 14.4 14.2 15.1 20.4 14.9 14.4 20.6 9.1 42.3 36.3 34.6 27.6 83.6 35.6 30.5 90.3 9.0 48.4 53.4 44.2 40.3 39.0 34.3 28.4 77.2 37.1 29.6 81.0 10.6 47.1 51.5 43.8 39.4 41.9 33.8 28.7 73.0 38.5 28.3 76.0 12.6

84.5 100.8 119.2 32.9 16.4 12.0 7.9 5.2 20.5 14.0 9.0 6.5 24.6 30.0 16.4 34.7 10.5 29.3 7.8 33.1

HindustanUnilever 417 ITC Marico Nestle* UnitedSpirits 230 172 4,867 717

99.7 121.9 145.0 48.8 30.6 38.6 49.4 23.4 32.3x 33.1x 30.6x

ConsumerGoodsMean ConsumerGoodsMean(market capwtdaverage) ConsumerGoodsMean(exNestle) Priceson 11 Apr12

*CYnumbers

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EdelweissSecuritiesLimited

SectorUpdate
EdelweissSecuritiesLimited,EdelweissHouse,offC.S.T.Road,Kalina,Mumbai400098. Board:(9122)40094400,Email:research@edelcap.com
VikasKhemani NischalMaheshwari HeadInstitutionalEquities CoHeadInstitutionalEquities&HeadResearch vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +912222864206 +912266233411

Coveragegroup(s)ofstocksbyprimaryanalyst(s):ConsumerGoods
AsianPaints,Colgate,Dabur,GodrejConsumer,Emami,HindustanUnilever,ITC,Marico,NestleLtd,GlaxoSmithKlineConsumerHealthcare,UnitedSpirits Date Company HUL HUL GCPL Buy Buy Title RecentResearch Price(INR) 404 403 483 Recos Buy Buy Buy

(INR)

1,150 950 750 550 350 150 Buy

04Apr12 26Mar12 23Mar12

BeautystorespactwithRIL; EdelFlash Focusonhighgrowth categories;VisitNote Exporting growth; VisitNote

DistributionofRatings/MarketCap
Buy

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

EdelweissResearchCoverageUniverse
Hold Reduce Total

RatingInterpretation Rating Buy Hold Reduce

Expected to

RatingDistribution* *1stocksunderreview
> 50bn

104

60

18

183
< 10bn

appreciatemorethan15%overa12monthperiod appreciateupto15%overa12monthperiod depreciatemorethan5%overa12monthperiod

Between 10bn and 50 bn

MarketCap(INR)

114

58

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