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Dabur: Profits surge due to deflationary scenario - Views on News from Equitymaster
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Dabur: Profits surge due to deflationary scenario
Aug 6, 2015

Dabur India declared results for the quarter ended June 2015. The company reported a revenue growth of 11% YoY during the quarter, while profits moved up by a fourth. Here is our analysis of the results.

Performance summary
  • Consolidated revenues rise by 11% YoY led by the company's foods and retail businesses.
  • Operating profits surge by 20% YoY led by a margin expansion of 1.2% YoY to 15.5%. Margin expansion mainly due to lower input costs.
  • Net profits rise by 24% YoY, largely in line with the operating profit growth.

Standalone financial performance
(Rs m) 1QFY15 1QFY16 Change
Net sales 18,689 20,695 10.7%
Expenditure 16,008 17,477 9.2%
Operating profit (EBDITA) 2,681 3,218 20.0%
EBDITA margin (%) 14.3% 15.5%  
Other income 359 479 33.2%
Depreciation 267 326 22.1%
Interest 101 117 15.8%
Exceptional items - -  
Profit before tax 2,672 3,253 21.8%
Tax 560 632 12.8%
Effective tax rate 21% 19%  
Profit after tax/(loss) 2,111 2,621 24.1%
Minority interest (3) (10) 209.4%
Net profit after tax/(loss) 2,108 2,611 23.9%
Net profit margin (%) 11.3% 12.7%  
No. of shares (m) 1,756.2 1,756.8  
Diluted earnings per share (Rs)*   6.4  
Price to earnings ratio (x)    49.1  
(*On a trailing 12-month basis)
Data Source: Company, Equitymaster research

What has driven performance in the quarter ended June 2015?
  • Dabur India reported a consolidated revenue growth of 11% YoY during the quarter. As per the company, the domestic business (two-thirds of total) expanded by 12% YoY, led by an 8% YoY volume growth. Its international business (one third of business) witnessed a growth of 9% YoY.

    Segment wise performance
    Segment 1QFY15 1QFY16 Change
    Consumer care 15,207 16,624 9.3%
    % of sales 81.6% 80.5%
    Foods 2,983 3,444 15.4%
    % of sales 16.0% 16.7%
    Retail 193 268 38.5%
    % of sales 1.0% 1.3%
    Other 256 306 19.6%
    % of sales 1.4% 1.5%
    Total 18,639 20,641 10.7%
    Data source: Company, Equitymaster research

    Growth was seen across the board with the main business segments of consumer care and foods growing by 9% YoY and 15% YoY respectively. Within the domestic space, the segments that led growth were oral care (17.5% growth, contributing to 14% of the domestic business) and OTC & ethicals segments (16.7% growth, contributing to about 9% of domestic revenues).

  • Dabur's operating profit margins expanded to 15.5% from 14.3% last year led by a sharp reduction in input costs (as a percentage of sales). The company is hopeful of maintaining margins at similar levels given the benign input cost scenario coupled with attempts towards reducing the less profitable low unit packs which are largely sold in the rural part of the country.

    Cost break up
    Particulars 1QFY15 1QFY16 Change
    Raw material costs 9,226 9,557 3.6%
    % of sales 49.4% 46.2%  
    Employee benefit 1,569 1,892 20.6%
    % of sales 8.4% 9.1%  
    Advertising & publicity 2,863 3,306 15.5%
    % of sales 15.3% 16.0%  
    Other expenses 2,350 2,722 15.8%
    % of sales 12.6% 13.2%  
    Total 16,008 17,477  
    Data source: Company, Equitymaster Research

  • Dabur's profits grew by 24% YoY, largely in line with the 20% YoY growth in operating profits.
What to expect?
At the current price of Rs 312, the stock of Dabur trades at a multiple of about 49x its trailing twelve month earnings and at about 39x our estimated FY17 EPS.

As per the management, demand in the rural markets is weak due to two key factors - one being the dull sentiments (given the erratic monsoon) and second being the liquidity crunch being witnessed by the distribution channel. Lack of access to funds, coupled with funds tied up in various asset classes has led to them to face such issues, leading to downsizing and destocking in the process. Also, as the trend has been across the FMCG players, rural demand has been slowing down while the urban segment has done well. Given that for products targeted for urban markets tend to be more profitable, it has been another factor that has led to better performance for Dabur.

Further, the company is also making changes to its distribution channel as it has now split up the front end team for its healthcare (OTC and ethical) segment from its domestic FMCG segment. For the former, the company will be hiring a big team to push products in the market (expanding doctor reach is key agenda).

Plus, with certain brands reaching critical sizes (Real juice brand for example) the company is finding it difficult to clock high historical growth rates. However, the company did manage to surprise in the toothpaste segment (a segment which is growing by 5-6% in volume terms), which grew by as much as 24% YoY given the strong growth in the Dabur Red and Meswak categories while its Babool brand has managed to arrest its de-growth. As for the hair oils segment, growth is expected to remain in the 10% category given the high penetration levels (as much as 90%).

A strong point in favour of the company is that it is not willing to compromise on its margins and will look to keep the benefits of the price reduction with itself. However, it would be doing so as long as the volumes are not compromised. Plus, the company also made it clear that it is not willing to expand its credit period to its distributors as it would be difficult to retract from the same as and when the scenario changes.

As for the international business, the same continues to grow well. However, the company is witnessing problems in the MENA region given the sharp depreciation in local currencies (trade is largely dollar denominated).

As for our view on the stock, we believe risk-reward ratio is largely skewed towards the former, and thus maintain our view that Dabur seems fully priced. We recommend subscribers not to buy the stock at this juncture.

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