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Dabur: Healthy performance…

Jul 29, 2005

Introduction to results
Ayurvedic major, Dabur, announced its 1QFY06 (June quarter) results a couple of days back. The company has continued to benefit from the improvement in the overall economic scenario, which is reflected in its bottomline growth of over 61% YoY during the quarter on the back of a 20% YoY topline growth. Margins saw a considerable improvement in the period under consideration.

Consolidated snapshot…
(Rs m) 1QFY05 1QFY06 Change
Net Sales 3,444 4,147 20.4%
Expenditure 3,113 3,659 17.6%
Operating Profit (EBDIT) 331 488 47.3%
Operating Profit Margin (%) 9.6% 11.8%  
Other Income 18 18 -1.6%
Interest 30 40 35.7%
Depreciation 65 72 11.1%
Profit before Tax 255 394 54.3%
Tax 34 50 45.6%
Minority interest (5) 4  
Profit after Tax 216 349 61.3%
Net profit margin (%) 6.3% 8.4%  
Effective tax rate (%) 13.3% 12.6%  
No. of Shares (m) 285.7 286.5  
Diluted earnings per share* (x) 3.0 4.9  
P/E ratio (x)   30.8  
(* annualised)      

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 received 1 share of the pharma business for every 2 shares held in Dabur India. 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 1QFY06?
Enticing topline:  The company reported an impressive topline growth, which was primarily driven by secondary sales (sales that are further down from the distributor to the retailer) that grew by 7% in volume terms, indicating continued buoyancy in demand. Baby care, digestives and health supplements registered good growth during the quarter. Also, with the restructuring of the Consumer Health Care Division (CHD) completed, this division generated encouraging scale and momentum for its range of Ayurvedic medicines and OTC portfolio during the first quarter. One must note that this growth has come about despite there being a stock restructuring activity that was undertaken by Dabur during the quarter on account of Balsara integration. However, institutional business (i.e. stockists, etc.) recorded lower off take because of lack of clarity in VAT implementation and guidelines.

Consolidated cost break-up
as a % of net sales 1QFY05 1QFY06
Total Cost of goods 43.2% 43.1%
Staff Cost 6.7% 7.6%
Advertising 14.3% 12.6%
Other Expenditure 26.2% 24.9%
Total Expenditure 90.4% 88.2%
International business contributes:  Dabur’s international business also displayed strong performance with its subsidiaries in Egypt and Bangladesh registering healthy growth rates. Also, the company has managed to strengthen its presence in Gulf countries through its international venture. It must be recollected that Dabur had acquired a company called ‘Redrock’ in Dubai with manufacturing facility and distribution infrastructure, and was rechristened Dabur International Ltd and is Dabur’s hub for its International expansion. In Pakistan too, where Dabur has a JV with a local company over there, the company registered a 14% YoY growth in sales, which were largely driven by growth in Hajmola.

Profits outpace sales:  There was an improvement of 220 basis points at the operating level for the consolidated entity. This improvement could be attributed to lower advertising costs (as % of net sales) and also lower other expenditure (see table above). The cost of production was also kept under control. However, all these benefits were curtailed to some extent owing to the rise in staff costs, which was seemingly owing to the additional staff strength on its books now, post Balsara acquisition. The growth in operating profits was largely reflected in the bottomline growth of 61% during the quarter.

Balsara – A positive move:  Currently Balsara is not as profitable as Dabur, but the latter remains determined to make it’s acquisition as profitable as itself. Dabur plans to achieve this by rationalizing costs, integrating the processes and products of Balsara in line with itself. In our view, 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 150, Dabur is trading at a price to earnings multiple of 15 times our estimated FY07 earnings and market cap. to sales of 2.1x. The company's June quarter performance has undoubtedly been encouraging. 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.

Dabur is one of our top picks in the FMCG sector, as it will benefit from an uptick in consumption, as well as from the acquisition of Balsara. This is already visible although we reckon that there will be some hiccups initially. In our view, Dabur has one of the best growth stories in the FMCG space.

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