Dalal Street

Colgate continues to witness steady toothpaste volume growth of 12-13%. The company has been witnessing market share improvement in both its flagship toothpaste brands,
Colgate Dental Cream (CDC) and Cibaca.

Management is effectively guiding for 15-16% adspend to sales ratio in H2F2010. Since Colgate’s adspend to sales ratio in H2F2009 was 13%, it is likely to witness an increase of around 180 to 380 bps rise in adspend to sales ratio in H2F2010.

Management notes that HUL has increased its adspend in the last couple of months and has taken some price correction by increasing the size of SKU at the same price points. Although, there are no market share gains by Dabur.

Although the company is open to increase its presence by introducing new product offerings from its parent’s basket, currently there is no new category that is being test marketed and the focus is solely on Oral Care.

Colgate is witnessing input cost inflation of 5-6% on yoy basis and this is on account of the increase in Sorbitol and packaging costs. The company has a forward cover on Sorbitol for the next two quarters, and hence there is unlikely to be any significant impact on gross margins.

Woes for Ranbaxy continued as the FDA has issued a warning letter to Ranbaxy’s liquid manufacturing plant at Gloversville (NY), citing cGMP violations (inspected in Jul/Aug 2009). It is one of the three plants in Ohm Labs; the others did not have any material deviations. Ranbaxy has engaged a consulting firm to address the issues.

Ranbaxy has indicated the plant accounts for under 10% of US (c.2%-3% of total) sales. Sales would continue and while approvals are likely to be on hold, there are not too many major filings pending approval from this plant. We see a worst case impact at c.2%-3% and c.5% of core sales and EPS respectively, and believe the FTF pipeline appears secure.

While this development, by itself, does not appear to have a material impact on financials or the key drivers, it is likely to affect recently rising confidence levels w.r.t. the stock among investors, given its past issues with the FDA [Whether targeted because American Pharma giant failed to outbid Japanese major, Daiichi Sankyo]

However, Daiichi Sankyo is committed to its plans and long term investors need not worry.

Reliance Industries (RIL) yesterday announced its third consecutive gas discovery (in as many wells) in its deepwater block D-3 in the KG Basin (KG-DWN-2003/1), where it holds a 90% stake (UK-based Hardy Oil owns the remaining 10%).

Analysts await the regulator’s [already under Oil Minister, who is under Reliance] decision on commerciality of the discovery, we believe this discovery reiterates the exploration upside potential of RIL from eastern India offshore. RIL owns 10 blocks in the prolific KG Basin and another 8 blocks in the adjoining prospective Mahanadi basin. No EPS / Estimates have changed on the back of this news yet.

As we move into 201, more news flow from RIL’s other exploration blocks, as two more rigs add to RIL’s current count of three in India (one each in D-6, D-3 and Cauvery Basin).