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Dabur: Landmark year

May 3, 2005

Introduction to results
Ayurvedic products major, Dabur, continued its strong growth momentum in the March quarter. The company has recorded a consolidated 15% topline growth and over 60% net profit growth during the quarter. The company shut it books for the fiscal with a 16% topline and a 46% bottomline growth.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net Sales 3,431 3,950 15.1% 13,296 15,370 15.6%
Expenditure 3,057 3,373 10.3% 11,743 13,281 13.1%
Operating Profit (EBITDA) 375 577 54.0% 1,553 2,088 34.5%
EBITDA margin (%) 10.9% 14.6%   11.7% 13.6%  
Other Income 44 32 -28.1% 91 92 1.5%
Interest 23 26 15.1% 153 124 -18.6%
Depreciation 82 97 18.4% 249 295 18.5%
Profit before Tax & Minority interest 314 486 54.6% 1,242 1,761 41.8%
Tax (including deferred tax) 41 53 29.3% 148 191 28.7%
Minority interest (1) 5 -697.4% (28) (12) -57.0%
Profit after Tax 272 437 60.5% 1,065 1,558 46.2%
Net profit margin (%) 7.9% 11.1%   8.0% 10.1%  
Effective tax rate (%) 13.0% 10.9%   12.0% 10.8%  
No. of shares (m) 286.2 286.4   285.7 286.4  
Diluted earnings per share (Rs)* 3.81 6.11   3.72 5.44  
P/E ratio (x)         21.5  

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 recently announced the takeover of Balsara for a consideration of Rs 1.4 bn.

What has driven performance in FY05?
Sales:  The performance was led by growth in key categories like Hair Care (Dabur Amla, Vatika, Anmol), Oral care (Red toothpaste, Lal Dant Manjan Meswak), Health Supplements (Chyawanprash, Honey, Glucose D) and Baby & Skin Care (Lal Tail, Gulabari, Vatika face pack). Hair care products which accounted for 38% of revenues in FY05, grew by 11% YoY which was led by oil and shampoo. Oral care (20% of revenues) registered an equally fast growth of 10.1% and with the acquisition of Balsara, this category is poised for faster growth in the coming quarters. Health supplements (23% of revenues) grew by a mere 2.4%, mainly due to decline in sales of Dabur Chyawanprash by 3.6%.The baby and skin care category (12% of revenues), grew by a robust 13.7%, mainly aided by its flagship brands Dabur Lal Tail and Gulabari. Dabur standalone Indian operations grew by over 10% in FY05.

Dabur's International business (Bangladesh, Egypt, Nigeria and Nepal) which accounts for 11.9% of the consolidated revenues, grew by over 43% YoY. The growth areas were mainly Egypt and Middle East, where turnover doubled over the previous fiscal, backed by Oral care and Hair care products.

Profitability:  There was improvement in margins for both the standalone as well as the consolidated entity. 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. The foods division grew by over 51% in FY05 with revenues of Rs 1.3 bn.

Consolidated Cost breakup
as % of net sales 4QFY04 4QFY05 FY04 FY05
Raw material 34.2% 33.3% 27.7% 30.0%
Staff 6.6% 6.4% 6.4% 6.5%
Advertising & promotion 11.4% 12.5% 12.9% 13.3%
Purchase of goods 11.9% 8.9% 16.0% 12.9%
Others 24.9% 24.3% 25.2% 23.7%
Total expenditure 89.1% 85.4% 88.3% 86.4%

The Balsara acquisition:  The company has acquired '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 along with its existing folio mix will enable Dabur to occupy all 3 segments in the market economy, middle and premium and also make it the third largest oral care player behind Colgate and HLL. The benefits of the acquisition will be evident in the coming quarters, as it restructures Balsara brands and pushes them through his distribution chain.

What to expect?
At Rs 119, Dabur is trading at a P/E of 21.5 times FY05 earnings and market cap. to sales of 2.1x. The company's performance has been no doubt encouraging during the March quarter. The business restructuring has paid off and that is good news over the long term. Also, with the acquisition of Balsara, Dabur will be a big player in the Indian oral care pie market.

The stock is trading at a P/E of 14.8 times our FY07 earnings estimates, and is one of our top picks in the sector. Dabur will benefit from an uptick in consumption, as well as from the acquisition of Balsara, which will be visible from 1QFY06. In our view, Dabur has one of the best growth stories in the FMCG space.

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