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Dabur: Conference call extracts - Views on News from Equitymaster
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Dabur: Conference call extracts
Feb 23, 2010

We recently attended the 3QFY10 conference call of Dabur India Ltd. The company is one of India’s more respected FMCG companies, having brands in categories like health care, oral care, foods, baby care, digestives, skin care and house hold care.

The company did well during the quarter with consolidated top line growth recorded at 18.6% YoY and net profits growing at a robust 27.4% YoY. This strong performance came on the back of strong double digit volume growth in the domestic market achieved by the consumer care and consumer health division, supported by growth in the international business. The profitability of international business is improving, thanks to better scale of operations. Moreover the company had taken large price hikes during the year which has resulted in large value growth during the quarter. The overall volume growth was 14% YoY during the quarter.

While the market is worried about the fall in demand due to high food prices, Dabur did not see any demand compression during the quarter. However, the company is worried about inflation from the demand side rather than from the margin perspective. This is because high food inflation may lead to lower disposable income and therefore less money to spend on discretionary items that make up the company’s portfolio.

On the raw material front, Dabur hedges its positions. The company has short term covers for raw material. However, the company is not taking a long term position as the management is unsure whether the price of raw material will harden going forward. As of now, the strategy of the company is to buy cover on dips. The management has indicated that it is not considering price hikes as of now. However, if food inflation persists for 2 more quarters then the company may decide to raise prices. But this would be the last resort. The reason is that high food prices may result in demand compression and if the company decides to raise the rate of its products it may only hasten demand destruction in those categories.

Advertisement spending for the company increased during the quarter as a result of new product launches, brand support and product innovation. Going forward the competitive environment is expected to shape the company’s advertisement expenditure. The margins in all categories have been expanding. This has given rise to the fear that multinational companies attracted to high margins may decide to enter the Indian markets. The likely hood of this event is expected to keep the advertisement spending up. Furthermore, the company is looking to grow its top line rather than margins at this stage.

Dabur having acquired Fem Care in June 2009 is not looking to launch new products. While the company has performed as per Dabur’s expectations, Dabur is looking to consolidate its new business before launching any new products. To improve focus of Fem Care, Dabur is creating a new vertical for it in terms of sales and distribution.

On the retail business, under the name of new u, the company has revamped its team and has worked on the business model. Dabur is now confident of scaling up its operations and plans to end the year with 15 - 20 up from 12 presently. The company had launched 5 new stores during the quarter. Moreover the company is seeing a lower net loss in this business in FY10 compared to FY09. The management believes the loss will be lower still even after the opening of new stores. The company plans to evaluate new stores it has opened and depending on their performance, may go for substantial scaling next year, taking the number of stores to 50.

During the quarter the company launched two new shampoos. These are Dabur Total Protect and a revamped anti dandruff range. Further, the company launched two new light hair oils and Uveda range of personal care products and Burrst fruit juice.

What we expect?
At a price of Rs 165, the stock is trading at 25 times our estimated FY12 earnings. While the company has done well, we expect raw material prices to weigh on the company’s margins. Further the company’s advertisement spending is expected to put pressure on the company’s earnings. For this reason, we would advise caution on the stock.

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