In the last few weeks the stock has risen by 22 per cent to Rs 226. However, despite the latest rally over the last month it has been underperforming the sensex in a significant manner and is a study in contrast with the other MNC FMCG stocks (with the exception of P&Gwhich also has been an underperformer).

Analysts, however, are of the opinion that the last quarter performance shown by Colgate is simply not sustainable. The quarter on quarter jump in earnings has come at an operating level due to a cut back on advertisement expenditure. Advertisement has developed into a significantly large cost head for the company over the last couple of years and any reduction here is bound to have a magnified effect on its profitability. For the three quarters until December 1998 the average operating margin has been just 7.5 per cent. But these margins have improved substantially in the last quarter. While this cost head has been reduced there has hardly been any significant topline growth, making a sustainable rerating of the stock a little suspect. Further, what has irked analysts is the fact that Colgate's reduction in ad-spend is in response to HLLs reduction in the last quarter. That say analysts, is not the way a market leader should behave.

Even though the growthexpectations of the market may be exaggerated the growth efforts of the company should be in line with that of most FMCG products given the fact that a significant thrust is being made simultaneously on children and rural users.

Given the emphasis that FMCG companies have on the rural market, the fact that real rural incomes have been rising y-o-y, have prompted a rerating of this stock, despite the lacklustre financial performance. The prediction of a normal monsoon for the current year has also raised the expected earnings potential from FMCG companies.

Despite the anticipation surrounding the company, analysts are cautious given the fact that in response to unprecedented competition in the toothpaste segment, the company is being forced to invest in brand building and marketing infrastructure, which will only pull up overheads. In addition, analysts feel that in the recent past the company has already pumped in huge amounts of funds into advertising, brand building and in its marketing infrastructure,with little positive effect on either its market share or its bottomline. According to analysts, the company has been losing its market share from 1994 onwards. This trend has only accelerated in the last two years, where its share has gone from 62 per cent of the toothpaste market to 54 per cent. In the intervening period, Hindustan Lever's market share Lever has risen to 34 per cent. The feeling that sector analysts have is that Colgate's market share will take a further beating in the next couple of years and could settle at 45 per cent or so.