Smile Back For Colgate-Palmolive, Thanks To Patanjali

Patanjali Ayurved Ltd.'s troubles may be evoking wide grins at Colgate-Palmolive India Ltd.

The maker of namesake toothpastes is set to claw back lost market share as sales in the natural category, where the oral care giant lagged peers like Patanjali, have fallen off the pandemic peak, according to analysts. That comes when inflation has slowed consumption.

The segment that got a "little bit of a fillip due to Covid-19 has now gone back to levels that were about three years earlier", Prabha Narasimhan, managing director at Colgate-Palmolive India, said in a post-earnings conference call. Demand in this corner of the market, according to her, continues to plateau and has even started to decline.

Better still, Narasimhan said, their own natural portfolio comprising Colgate Active Salt, Charcoal, and Vedshakti continued to grow.

Colgate-Palmolive controls nearly half of India's $1.82 billion oral care market but lost share to Baba Ramdev-backed Patanjali and Dabur India Ltd. as it couldn't match their herbal appeal. The two also gained at the expense of Pepsodent, made by Hindustan Unilever Ltd.

Colgate, which entered India more than eight decades ago, saw its volume market share in the mainstay toothpaste segment erode over the last seven years—from 55% in FY17 to 48.5% in FY23—as consumers shifted to natural products. Dabur and Patanjali dominate that segment.

Dabur India, the maker of Dabur Red and Babool toothpaste; and Patanjali Ayurved, with its muddy-brown Dant Kanti, cumulatively garnered about 28% share in the natural segment in the last seven years, according to NielsenIQ data sourced from industry executives.

Between 2016 and 2019, the natural's share in the overall market expanded by 900 basis points, according to a Colgate-Palmolive presentation. But since 2020 through March 2023, the category has lost 30 basis points.

The natural brands are unable to fulfil customer requirements and that could be a reason why consumers are shifting to "science-based products", said Narasimhan, also the CEO of Colgate-Palmolive India. The consumer giant is among the multinational companies that were targeted by yoga guru Ramdev.

Dabur India's Chief Executive Officer Mohit Malhotra attributed the decline to the slowing growth of Patanjali, which he said was driving the market earlier. "Otherwise, the naturals segment continues to trend higher."

Whatever the cause, analysts expect Colgate to be a likely beneficiary.

It's good news for Colgate-Palmolive as the natural segment was one of the key causes of the decline in the company's market share over the last seven to eight years, said Krishnan Sambamoorthy, head of research at Nirmal Bang Institutional Equities.

Dabur's toothpaste sales fell 3% in the fourth quarter ended March, when Colgate and HUL's Close-Up grew in the high single digits, according to Jefferies. "We expect Colgate to gain market share, particularly from players in the natural or herbal space."

Demand for oral care products, considered a discretionary expenditure, is slowing as consumers cut back spending to counter rising prices. While that stagnated Colgate-Palmolive's volumes, the company stemmed the decline seen in the previous four quarters.

Colgate's toothpaste volumes were flat in the fourth quarter when the overall category declined 2-3%, said Himanshu Nayyar of Systematix Research in a note co-authored with Rajesh Mudaliar. That, the brokerage said, suggests the company may have gained some market share in toothpaste.

The report attributed it to a combination of pricing actions, a decline in the share of the natural category, premiumisation, a pick-up in marketing spends, and distribution efforts. The company also launched Colgate Gum Expert to strengthen its natural portfolio.

Shares of Colgate-Palmolive rose 0.10% to trade at Rs 1,602.05 apiece, compared with a 0.49% gain in the benchmark Nifty 50 as of 10:09 a.m. on Monday. The stock has risen over 5% year to date compared with a 1.7% increase in the benchmark Nifty 50.

Of the 34 analysts tracking the stock, seven maintain a 'buy' rating, 17 suggest a 'hold,' and 10 recommend a 'sell', according to Bloomberg data. The average 12-month return potential implies an upside of 1.3%.

Analysts at Systematix cite the expected market share gain as a key trigger for the stock.