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Dabur: ‘Healthy’ growth! - Views on News from Equitymaster

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Dabur: ‘Healthy’ growth!

Jul 19, 2006

Performance summary
Ayurvedic major, Dabur announced its 1QFY07 results yesterday. The company reported yet another quarter of sustained growth momentum, which is reflected in its bottomline growth of near 38% YoY on the back of a 15% YoY growth in topline. Margins also saw a considerable improvement during the period under consideration, mainly due to decline in cost of goods sold.

Consolidated Picture
Rs (m) 1QFY06 1QFY07 (%) Change
Net sales 4,147 4,755 14.7%
Expenditure 3,655 4,116 12.6%
Operating profit (EBDITA) 492 639 29.9%
EBDITA margin (%) 11.9% 13.4% 1.50
Other income 18 53 191.7%
Interest 40 41 1.5%
Depreciation 76 97 28.1%
Profit before tax 394 554 40.6%
Minority interest 4 8 -
Tax 50 80 61.6%
Profit after tax/(loss) 349 482 38.3%
Net profit margin (%) 8.4% 10.1%  
No. of shares (m) 286.5 573.7  
Diluted earnings per share (Rs)*   4.0  
Price to earnings ratio (x)   34.0  

What is the company’s business?
Dabur is India’s fourth largest FMCG company with interests in health care, personal care and food products. The company’s name is generic to ‘ayurvedic’ products in India, and it has big brands like Vatika (hair oils), Chyawanprash, Hajmola, Amla oil and Lal Dant Manjan (oral care) under its stable. In FY04, Dabur approved the demerger of its FMCG and pharma businesses, into two separate listed entities. The move was aimed at bringing in more focus to both businesses, as well as to unlock value for shareholders. Further, the company acquired Balsara’s business in FY05 for a consideration of Rs 1.4 bn.

What has driven performance in 1QFY07?
Revenue growth momentum continues: Dabur reported an enthusing topline growth during 1QFY07, driven by a pick-up in key categories in the consumer care division, consumer health care (12% YoY), foods (14% YoY) and international business (14% YoY). Home care business also recorded an impressive growth of nearly 13% YoY, mainly driven by products like Odonil and Sanifresh.

The company’s hair care division also performed well during the quarter. Hair oils grew by 12% YoY, while Vatika shampoos registered 39% YoY growth. The oral care segment performed well with 20% YoY growth with its market share in the toothpaste category touching 7.7% (7.2% in May 2006). Baby and skin care segment also continued its upward march posting an 8.5% YoY growth. The health supplements division posted a robust growth of 26%. Chyawanprash upped its market share by 60 basis points during the quarter to around 63%.

International aid: Dabur’s international business grew by 14% YoY during 1QFY07. Gulf countries, which account for more than one-third of the international business revenues, grew by 19% YoY. The company’s Egypt and UK markets grew 52% and 21% respectively. Dabur has also opened a new subsidiary in Pakistan and the company expects growth from the new region to be strong in the coming years.

Consolidated cost break-up
As a % of net sales 1QFY06 1QFY07
Total Cost of goods 43.1% 41.0%
Staff Cost 7.5% 7.7%
Advertising 12.6% 13.7%
Other Expenditure 24.9% 24.2%

Operating benefits for bottomline: There was an improvement of 150 basis points at the operating margin level for the consolidated entity. This improvement could be attributed to lower cost of goods (as % of net sales) and also lower other expenditure (see table above). However, all these benefits were curtailed to some extent owing to the rise in staff costs and higher advertising costs. The growth in operating profits was largely reflected in the bottomline growth of 38% YoY during the quarter.

What to expect?
At the current price of Rs 135, the stock is trading at a price to earnings multiple of 34 times its trailing 12 months earnings, which we believe is expensive. Going forward, the company is planning to launch new variants across its shampoos and home care segments. It is also investing about Rs 1 bn for its foods division. The management also seems buoyant on the international business and is even looking for acquisitions. However, despite all the growth potential inherent in the company’s current strategy, investors need to practice caution with respect to valuations.

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