While increasing popularity and the subsequent rising market share of Hindustan Lever's toothpaste brand, "Pespodent" is the main factor which has affected Colgate's market share in the dental care segment, Colgate's stock performance has been dismal on account of other factors as well.

Huge equity dilution has been the prime reason. The equity share capital stood at Rs 15.72 crore in 1988. This had steadily grown to Rs 31.44 crore in 1991-92 and Rs 50.30 crore in 1992-93 respectively. This further jumped to Rs 135.99 crore in 1994-95.

The market could have absorbed these equity dilutions had the company maintained its sales and profit growth. The performance of the stock was impressive till the beginning of 1994 simply because the impact of the dilution (around 8.56 crore shares)felt in later years.

Sales growth had been impressive till 1995-96. Except the year 1994-95, sales growth had been in the range of 17 per cent-30 per cent. In fact, sales growth during 1997-98 has been the lowest in the last ten years. For the year ended March 31, 1998, sales recorded a meagre jump of 3.02 per cent.

Not only has the growth slowed down during 1997-98, the company has also taken a hit on other fronts. The average credit period given to the customer has risen from 21 days to 25 days. Similarly, as compared a 3 per cent improvement in sales, inventories recorded a sharp jump by 22.6 per cent during the financial year 1997-98.

Slowdown in offtake also had its impact on the operating margins which has taken a sharp beating. With a 10.08 per cent drop in operating profit, margins at the operating level have fallen from 17.01 per cent to 12.7 per cent during 1997-98.

To keep pace with the increasing competition and since the company is fighting to retain its market share, expenditure onadvertising has risen sharply during 1997-98. The company has stepped up advertising support for important products like Colgate Claciguard, Colgate Fresh Stripe Gel, Colgate Double Protection, New Longer Lasting Colgate Total and Axion the surface cleaning product. In fact, a sharp jump in advertising is the only reason why the operating profit margins have fallen. At Rs 147 crore, the advertising costs accounted for 14.95 per cent of the sales as compared to 10.8 per cent in 1996-97, a sizeable increase.

The decline in operating profit margins further accelerated during the first quarter of the current year; 1998-99. For the first quarter, while the sales recorded a negative growth of 7.3 per cent to Rs 217.76 crore, operating profit margin stood at 7.34 per cent, down from 15.41 per cent in the corresponding period in the previous year.

After the announcement of these results, the stock has lost 25 per cent of its market price or Rs 63. With this fall, the stock has broken its major support level at Rs215. This is nothing but an indication of weakening position of the stock and hints at a fall as the next support level is far off from the current level.

The fundamental position also favours this argument and the market logic. Colgate has been losing market share and it has failed to achieve any major penetration in the oral-care segment, despite product improvements. With stiff competition from Hindustan Lever's Pepsodent and Close Up brands in the dental care segment, the company will have no option but to continue spending huge amounts on sales promotion to try and take back the market share that it lost. While snatching back the lost market share would undoubtedly be a difficult task, even if the company did succeed, it would definitely be at the cost of its profit margins, which are already under pressure.Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.