CLSA puts ‘sell’ on Colgate as Oral-B launches paste

MUMBAI: CLSA has recommended investors to ‘sell’ Colgate following media reports that Proctor & Gamble has launch Oral-B toothpaste in the Indian market after successfully selling toothbrushes.

As per reports, P&G has launched its toothpaste under ‘Oral B’ brand, with three variants (mass, premium, gel). At mass and premium, Oral-B is priced at 12-18 per cent premium while gels are priced at a 14 per cent discount to competing Colgate’s brand.

CLSA sees the foray as a threat for the market leader Colgate which derives 95 per cent revenues from oral care.

“Channel checks indicate that consumer prices of the mass and premium end are at 12-18 per cent premium to Colgate offerings while gel is at a 14 per cent discount. The price points are a bit surprising, though comes as a relief at the mass-end since P&G has a history of indulging in price-wars by pricing products at a discount to popular price points and is set to splash the market with heavy ads,” the report said.

According to the brokerage, with the toothpaste launch, P&G is set to increase its aggressive in media to support the new products which is a clear negative for companies like Colgate, HUL and Dabur. These companies will have to increase their ad-spend budget to maintain their market share.

“P&G has a tough task ahead given the strong brand recall that Colgate enjoys with 53 per cent share. We however think that P&G’s foray would drive up A&P spends impacting sector margins. In this context, we note that Colgate’s A&P moved up from 4.7 per cent in 1993 post HUL’s launch of ‘Pepsodent’ and remained high with emergence of players viz. Balsara, Dabur,” the report added.

CLSA is of the view that at 34x one year forward PE, valuations of Colgate are expensive in the context of weak earnings CAGR of 12 per cent over FY13-14 and risk of rise in competition.

At 01:30 pm, the stock was at Rs 1,344, down 0.70 per cent, on the BSE. It touched a high of Rs 1,355 and a low of Rs 1,338 in trade today.