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Dabur: What to do?

Jun 27, 2003

Dabur India Limited has recently decided to demerge its FMCG and Pharma businesses into two separate companies. The company had also reported its FY03 numbers recently. Let's take a look.On a consolidated basis, Dabur finished FY03 with a 7% topline growth and over 37% net profit growth. The company's operating profit margins improved by a percent, as sales increased at a faster clip compared to expenses. Softer interest rates too reduced the company's debt servicing costs. All this helped the ayurvedic product major post a healthy bottomline growth in FY03.

Consolidated Picture
(Rs m)FY02FY03Change
Net Sales12,81013,7097.0%
Other Income12072-40.1%
Expenditure11,48712,1635.9%
Operating Profit (EBDIT)1,3231,54616.9%
Operating Profit Margin (%)10.3%11.3% 
Interest333261-21.6%
Depreciation2872932.2%
Profit before Tax8231,06429.2%
Tax (including deffered tax)136.70133.30-2.5%
Profit after Tax68693035.5%
Less: Minority Interest-22-20 
Net Profit/(Loss) after minority interest66491137.1%
Net profit margin (%)5.4%6.8% 
Effective tax rate (%)16.6%12.5% 
No. of Shares (eoy) (m)285.6285.7 
Diluted earnings per share*2.43.3 
P/E ratio 14.7 

If we look at the performance of its FMCG business (i.e. ayurvedic products, hair oils, oral care, honey, OTC products etc.) and the pharma business (oncology etc.) seperately, we see that almost 85% of Dabur's turnover comes from its FMCG business. This business grew at nearly 5% in FY03, but a grip on operating costs saw operating profits improve by over 21% YoY. This and lower interest outgo helped the FMCG division post over 31% growth at PBT levels. The businesses ROCE doubled to nearly 25% during the year.

On the other hand, the company's pharma business grew at a faster rate (nearly 13%) during FY03, on a lower base. However, realisations were under pressure, as witnessed by the dip in operating margins. Higher staff and advertising costs led to this pressure on margins. The business however, earns higher operating margins than the FMCG division. It finished FY03 with a 10% growth. The ROCE of the pharma business also improved marginally to over 6% from 5% in FY02.

 FMCG businessPharma business
(Rs m)FY02FY03ChangeFY02FY03Change
Net Sales10,00310,4854.8%1,6291,83812.8%
Other Income9449-47.6%4534-24.9%
Expenditure9,1409,4383.3%1,4261,62213.7%
Operating Profit (EBDIT)8631,04721.4%2032166.6%
Operating Profit Margin (%)8.6%10.0% 12.5%11.8% 
Interest167119-28.7%7252-28.7%
Depreciation180177-1.4%304343.7%
Profit before Tax60980031.2%1461556.7%
Tax (including deffered tax)857-91.6%2624-6.6%
Profit after Tax52579351.1%1201319.6%
Net profit margin (%)5.2%7.6% 7.4%7.1% 
Effective tax rate (%)13.9%0.9% 17.7%15.5% 
No. of Shares (eoy) (m)285.6285.7 142.8142.9 
Diluted earnings per share*1.82.8 0.80.9 

The ratio for demerger has been set at 1 share of pharma business for every 2 shares held in the original entity. The shareholders will however, receive FMCG business shares in the ratio of 1:1. The move is aimed at bring in more focus to both businesses, as well as to unlock value for shareholders.

Considering the demerger, even if we give Dabur a valuation of 15 P/E for its FMCG business, the price works out to be around Rs 42 per share and therefore, a market cap to sales of 1.1x. Though this is not a full proof method of arriving at a company's business valuation, it does give some indication of value. This business is the core strength of Dabur currently and going forward it has the capability to grow steadily. However, in the pharma business, the company is at a nascent stage and till date has not shown any remarkable edge in this area. In that light, the value of this business wil not be much. At a conservative 5 P/E, the price of this business will work out to be around Rs 5 per share (taking into consideration the reduction of no. of shares by half).

At the current price of 48, Dabur (consolidated) trades at a P/E of 14.7x FY03 earnings. In our view, the business is already valued by the markets. Further improvement in valuations will come only after more clarity about management strategy post the demerger. Also, the promoters past track record on bringing in professional managers is not too enthusing.

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