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Dabur: Conference call extracts - Views on News from Equitymaster

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Dabur: Conference call extracts

May 18, 2010

We recently attended the FY10 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 year with consolidated top line growth recorded at 19.7% YoY and net profits growing at a robust 28.7% 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. For the company, international volume growth for FY10 was 19.8% YoY while 2.4% YoY growth came from price increases. Translation gains resulted in 4% YoY growth. For the domestic business, the volume growth was 11.8% while price increases resulted in 2.2% YoY growth.

Food inflation has been hurting the company during the quarter. As a result, to maintain its margins, the company has already raised prices of its products this financial year. This price increase has been between 4% and 5%. Going forward, the company may have a second round of price increases. The quantum of increase will depend on inflationary pressures. Dabur does not intend increasing the price of its products as a mean to expand margins. Instead, the company is looking at maintaining its margins through these price increases. However, we may see a margin expansion in case of the benefits of lower raw material costs flowing to the bottom line.

Dabur did not face any fall out of high food inflation and saw good demand for its products during the year. However, going forward, the situation can become challenging if the monsoons are not normal. Nevertheless, if inflation falls sharply then competitive pressure would result in higher advertisement spending. This would act as a check for expansion of margins.

As far as competition is concerned, Dabur is not seeing any disruptive competition. Some competitive activity is seen in the shampoo space e.g., HUL lowering the price of its products and P&G increasing the grammage of their products. However, this is normal business tactics and the company is taking appropriate steps to ensure that it continues to grow in all segments.

On the retail side, the company is witnessing increase in footfalls and velocities as the economy is improving. The company is confident that it has got its business model right and had opened 7 stores since January 2010. Dabur now wants to end the financial year with 42 - 50 stores.

On the demand front, Dabur feels that the rural demand would be the driving force in domestic business as it is expected to grow faster than the urban demand. The reason for this is the rural economic stimuli and National Rural Employment Guarantee Act (NREGA). On the other hand, the reason for slack urban demand is inflation. The urban poor have been specially hit because of inflation and no other source for income. The company expects demand to pick going forward as inflation tapers.

What we expect?
At a price of Rs 182, the stock is trading at 27.4 times our estimated FY12 earnings. The company has performed well on the back of volumes during the year. However, going forward a lot would depend on monsoons and competitive pressure would ensure that margins do not expand dramatically from here. For this reason, we would advise 'CAUTION' on the stock

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