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Dabur: Performance plus Balsara positive

Jan 28, 2005

Performance summary
Ayurvedic products major, Dabur, reported nearly 11% growth in the December quarter consolidated sales. All key segments contributed to this strength in topline. This, as well as an improvement in operating margins, led to the company clocking a strong 42% growth in 3QFY05 profits. The company's India operations reported over 9% topline growth during the quarter. Here too, sales momentum as well as improvement in operating margins led to the net profit growing by a significant 45% YoY.

Dabur India (consolidated)
(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net Sales 3,849 4,266 10.8% 9,865 11,420 15.8%
Expenditure 3,380 3,675 8.7% 8,647 9,909 14.6%
Operating Profit (EBDITA) 469 591 25.9% 1,217 1,511 24.2%
EBDITA margin (%) 12.2% 13.8% 12.3% 13.2%
Other income 23 21 -9.5% 47 60 29.6%
Interest 38 35 -8.7% 130 99 -24.4%
Depreciation 81 57 -29.4% 206 198 -4.0%
Profit before Tax 374 520 39.2% 927 1,275 37.5%
Tax 38 48 26.0% 107 138 28.5%
Minority interest -3 0 -96.3% -20 -17 -17.8%
Profit after Tax 333 472 41.8% 800 1,121 40.1%
Net profit margin (%) 8.6% 11.1% 8.1% 9.8%
Effective tax rate (%) 10.2% 9.2% 11.6% 10.8%
No. of Shares (m) 286.2 286.4 286.2 286.4
Diluted Earnings per share (Rs)* 4.6 6.6 3.7 5.2
Price to earnings ratio (x) 18.8
(* annualised)

What is the company's business?
Dabur India Limited is India's 4th largest FMCG company with interests in health care, personal care and food products. The company's name is generic to the ‘ayurvedic' products in India. The company's top 5 brands namely, Vatika (hair oils), Chyawanprash, Hajmola, Amla oil and Lal Dant Manjan (oral care) contribute 55% to revenues. In FY04, Dabur approved the demerger of its FMCG and pharma businesses, into two separate listed entities. Consequently, existing shareholders are to receive 1 share of the pharma business for every 2 shares held. The move was aimed at bringing in more focus to both businesses, as well as to unlock value for shareholders. It has just announced the takeover of Balsara for a consideration of Rs 1.4 bn.

What has driven performance in 3QFY05?
Sales: The performance was led by volume growth in key categories like hair care (Vatika, Anmol, Amla), health supplements (Chyawanprash, Glucose D, Honey) and oral care (Lal Dant Manjan, Red toothpaste, Binanca). Hair care products, which account for nearly 39% of Dabur standalone sales, grew by 14.4%, while health supplement volumes (11% of standalone sales), grew by 6% during the quarter. Oral care volumes grew by a slower rate of 10.6%, owing to the decline of volume sales in the toothpowder category (Lal Dant Manjan). The Dabur Red Toothpaste however, continued to show growth and captured 1.8% share of the oral care market. The company's baby care category (Lal tail) grew by 6% during the quarter. Ayurvedic Specialties division, comprising of OTC products and Ayurvedic medicines, registered a growth of 12%. Consequently, Dabur standalone India operations grew by over 9% during the quarter (86% of consolidated 3QFY05 revenues). However, Chywanprash saw a flattish performance during the quarter, which the company hopes to recoup in the March quarter.

Dabur International Limited, the Dubai based subsidiary and the hub for all its international operations, grew by 36% in revenues. The company has also incorporated a local subsidiary in Nigeria - African Consumer Care, for tapping the Nigerian and West African markets. Dabur Foods Limited (8.4% of consolidated revenues), a subsidiary of Dabur India, manufacturing Real fruit juices, Hommade and Lemoneez, posted an increase of 61% in sales during the period under review. Real, the flagship brand for Dabur Foods, continued to spearhead growth (44% YoY). Sales of Hommade brand were also up 38% YoY during the quarter.

Profitability: There was improvement in margins for both the standalone as well as the consolidated entity. Advertising and other expenditure grew at a slower clip as compared to sales. Strong sales performance, both in key categories in the domestic markets, as well as continuing sales growth in the company's international operations was the primary reason for the strength in bottomline. Operating margin strengths aided this performance. Dabur Foods reported profits of Rs 5.3 m during the quarter on a consolidated basis.

Consolidated cost break-up
as a % of net sales 3QFY04 3QFY05 9mFY04 9mFY05
Cost of goods 41.7% 43.7% 42.9% 43.2%
Staff cost 5.9% 6.1% 6.4% 6.6%
Advertising 14.8% 14.1% 13.4% 13.5%
Other expenditure 25.5% 22.2% 25.0% 23.5%

The Balsara acquisition: The company has acquired the unlisted 'Balsara' companies and all its well known brands for a total cash consideration of Rs 1.4 bn. The 3 Balsara companies that have been acquired are 'Balsara Hygiene Products' (99.4% stake), 'Balsara Home Products' (100%) and 'Besta Cosmetics' (97.9%), with combined revenues of Rs 2 bn (as of FY04). Consequently, Dabur will own brands like Promise, Babool and Meswak in oral care segment, Odomos mosquito repellant and household care brands like Odonil, Odopic and Sanifresh.

The deal is a good fit for Dabur's existing oral care folio and will propel it into No. 3 position in this segment (11.1% share), behind Colgate and HLL. It will not only enable Dabur to grow these brands through its extensive distribution network, but also bring about cost synergies in advertising and sourcing etc. in the long run. Though Balsara posted a net loss of Rs 80 m in FY04, Dabur is confident of turning it around in a couple of years. Based on FY04 revenues, the deal should add about 15% to Dabur's topline immediately (post shareholder approval). Dabur is paying for this acquisition mostly through internal accruals and will take a debt of only Rs 200 m for this deal. However, Balsara does have a debt of Rs 350 m on its books.

What to expect?
At Rs 98, Dabur is trading at a P/E of 18.8 times annualised consolidated 9mFY05 earnings and market cap. to sales of 1.8x. The company's performance has been no doubt encouraging during the December quarter. The business restructuring has paid off and that is good news over the long term. The Balsara acquisition too, is a good fit for Dabur in the long run. We had rated Dabur as a BUY in May 2004, with a target price of Rs 115 (including Dabur Pharma). Since then, the company's performance has been as per our expectations. We will update our report on Dabur soon to give you a sense of Balsara numbers and the big picture.

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