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Investors can use recent market declines to add the Colgate Palmolive India stock to their portfolio. Strong rural offtake for FMCG products and Colgate’s expanding market shares in oral care suggest that the company could sustain strong topline growth over the next 2-3 years.

Colgate’s profit growth may outpace sales growth, as it widens its product mix and lowers tax incidence by shifting more of its production to tax-free zones. At the current market price, the stock trades at about 19 times its expected earnings for 2008-09 and about 16 times expected earnings for 2009-10, at par with FMCG peers. The company’s strong cash coffers, rising dividends and high dividend yield also make the stock a good defensive pick in a volatile market.

Colgate Palmolive India, which holds a 49.2 per cent market share in toothpastes and a 35.2 per cent share in toothbrushes, is the dominant player in the Indian oral care market. Oral care products have seen strong volume growth over the past year, driven by consumer upgrading (from toothpowder to paste) and strong rural offtake.

As the only other FMCG company apart from Hindustan Unilever to have an extensive rural distribution network, Colgate appears well placed to capitalise on strong rural demand for FMCGs, which is being driven by buoyancy in rural incomes and spending power. In the past year, Colgate has been able to expand its oral care market share on the back of new product launches and a strong presence in the economy segment where rival Hindustan Unilever does not have a major presence. Given its dominant market share, Colgate enjoys considerable pricing power to pass on input cost increases to consumers.

The company has also made attempts to widen its relatively narrow product basket through an entry into shower gels and body washes and has been steadily expanding its offerings under the “Palmolive Naturals” as well as “Palmolive Thermal Spa” range. Shower gel is a high growth segment which offers superior profit margins. Colgate’s strategy of shifting from outsourcing to own manufacture of products and locating new facilities in tax-free zones, has also led to steadily improving profitability. Its operating profit margins have moved up from 17-18 per cent to 22 per cent over the past 3 years. The company closed the nine months ended December 2007 with a 14-per cent growth in sales and a 30-per cent growth in net profit (excluding one-off items), despite significantly higher advertising spends.

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