'Patanjali will hit a ceiling': Time to look at Colgate, Dabur?

An upturn in rural demand is likely to benefit consumer companies and the best two plays in the sector continue to remain Dabur and Colgate, says Jubil Jain of PhillipCapital.Speaking to CNBC-TV18 from the sidelines of the PhillipCapital Investment Conference, Jain said Dabur was poised to do well in all segments barring honey, where the entry of Baba Ramdev's Patanjali has hurt it."It has increased its toothpase market share. In the natural and herbals category, Dabur has a good name," he said.He conceded that Patanjali is the first company in decades to seriously dent Colgate's dominance."But Patanjali's appeal is limited. It will hit a ceiling sometime soon," he said.Below is the transcript of Jubil Jain’s interview with Latha Venkatesh and Reema Tendulkar on CNBC-TV18. Reema: Up until now, the rural growth has been quite lack lustre, very similar to the urban growth. Now with the expectations of a normal monsoon, do you expect rural growth to be significantly better this year and outpace urban demand and therefore, how would you approach the consumer sector this year?A: The rural growth has been lagging for the last two years. And if you look at the growth rates as you correctly pointed out, it has been similar to urban growth rates, that is what many companies have also pointed out. But we think that the rural growth should actually start improving. There are various reasons. First of all, if you look at monsoons, India Meteorological Department (IMD) has predicted that this year the monsoons will be around 106 percent of the normal average. So that will definitely help to grow the agricultural gross domestic product (GDP). But today, in the panel discussion which we had at the Phillip Capital India Conference, it was pointed out by one of the panellists that agricultural GDP is only 30 percent of rural GDP. The rest comes from manufacturing and services, so there is a lot more that needs to be done by both the government as well as the private sector to prop up the rural demand. And when I look at it from the perspective of the government, the government is doing, if you look at the Budget for 2017, the government has increased the rural stimulus from Rs 80,000 crore to Rs 88,000 crore. The allocation from Mahatma Gandhi National Rural Employment Gurantee Act (MNREGA) has been increased. If you look at the grant in aid to the Gram Panchayat, that has been increased by more than 200 percent to Rs 2.87 lakh crore.Latha: I would assume that all that is already there in the Q4 numbers. From the Q4 numbers and looking at the time ahead, would you say that the threat of Patanjali is over because I noticed that you have a buy on Dabur and Colgate?A: When it comes to Dabur, we feel that barring the category of honey, the other categories of Dabur will actually continue to do well. So, in honey they will definitely face some challenges from Patanjali. They have tried to introduce new products and they have decreased the prices. But when it comes to toothpaste, they have actually been growing their tooth paste category. The toothpaste market share has actually increased by 100 basis points. So, that is actually helping Dabur grow this category. Similarly, other categories, when it comes to naturals and herbal space, Dabur has a very good name and the overall revival which we are seeing in the natural and herbal category, the increased interest, that should actually help Dabur. When it comes to valuations, it is actually available at a considerable discount when you compare it to the likes of Hindustan Unilever. If there is a rural growth revival, probably it may not happen in Q1. You might need to wait for Q2, but once that starts happening, Dabur has the highest share of sales from rural areas, around 45 odd percent. So, that should definitely start impacting the numbers.Reema: While Patanjali may have expanded Dabur’s toothpaste market by 100 basis points, it has eaten into Colgate’s market share. Colgate’s market share come down by nearly 150 basis points. Would you not worry about increasing competition hurting Colgate?A: Definitely, it has been hurting Colgate and if you look at the market share as you correctly pointed out, it has been falling, but what we feel is that Patanjali’s market share should also start hitting a ceiling, sometime soon. So, if you compare the various disruptions that have happened in the oral care category for the last 20 years, no one has actually been able to hit the market share of Colgate to a very huge extent. When it comes to Patanjali, definitely the product is very good. But the amount of appeal it will have to the entire section of the consumers, that will be limited because it is a herbal, ayurvedic product an only a certain proportion of the consumers, the people who have started using Patanjali will retain it whereas when it comes to Colgate, it is continuously increasing its innovation.