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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) FY02 FY03 Change
Net Sales 12,810 13,709 7.0%
Other Income 120 72 -40.1%
Expenditure 11,487 12,163 5.9%
Operating Profit (EBDIT) 1,323 1,546 16.9%
Operating Profit Margin (%) 10.3% 11.3%  
Interest 333 261 -21.6%
Depreciation 287 293 2.2%
Profit before Tax 823 1,064 29.2%
Tax (including deffered tax) 136.70 133.30 -2.5%
Profit after Tax 686 930 35.5%
Less: Minority Interest -22 -20  
Net Profit/(Loss) after minority interest 664 911 37.1%
Net profit margin (%) 5.4% 6.8%  
Effective tax rate (%) 16.6% 12.5%  
No. of Shares (eoy) (m) 285.6 285.7  
Diluted earnings per share* 2.4 3.3  
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 business Pharma business
(Rs m) FY02 FY03 Change FY02 FY03 Change
Net Sales 10,003 10,485 4.8% 1,629 1,838 12.8%
Other Income 94 49 -47.6% 45 34 -24.9%
Expenditure 9,140 9,438 3.3% 1,426 1,622 13.7%
Operating Profit (EBDIT) 863 1,047 21.4% 203 216 6.6%
Operating Profit Margin (%) 8.6% 10.0%   12.5% 11.8%  
Interest 167 119 -28.7% 72 52 -28.7%
Depreciation 180 177 -1.4% 30 43 43.7%
Profit before Tax 609 800 31.2% 146 155 6.7%
Tax (including deffered tax) 85 7 -91.6% 26 24 -6.6%
Profit after Tax 525 793 51.1% 120 131 9.6%
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) 285.6 285.7   142.8 142.9  
Diluted earnings per share* 1.8 2.8   0.8 0.9  

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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