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Dabur: In the reckoning

Aug 31, 2000

Dabur India, the 115 year old FMCG ‘ayurvedic’ company operates in the niche natural/ayurvedic products segment with a product folio of over 500 products. Its core competence lies in its ability to conceive, develop and market products based on herbs and natural resources. Its product portfolio includes major brands like Dabur Chyawanprash, Hajmola, Pudin Hara, Lal Dant Manjan, Amla, Vatika hair oils, Real fruit juice, Dabur Honey, all of which are market leaders in their respective segments. It is also a leading player in the anti-cancer segment and was the first company in India to have developed the anti-cancer intermediary DAB-10 and its associated drug paclitaxel (Taxol). But despite its range, investors have been wary of investing in this company simply because of its unrelated diversifications and a family run business. To counter this, Dabur undertook a restructuring exercise about a couple of years ago, based on McKinsey recommendations. As a result, it decided to spin off non-core businesses and inducted an all-new professional management team.

The markets took notice of these initiatives and stock price climbed. But lately, Dabur has been facing the music on the bourses. The company’s stock is quoting at Rs 690 levels, which is 25.7 times its FY2000 earnings. At its 52 week peak, the company quoted at a P/e multiple of over 60 times.

This is despite a 53% growth in net profit for the year ended March 2000 over the previous year. The growth in sales amounted to 13.4%. This is by any yardstick a creditable performance when most FMCG companies (including HLL) are clocking single digit turnover growth. Its margins also showed a marked improvement over the previous year. However, in its first quarter the company has shown signs of slowing down. Turnover growth slowed to 7%, compared to a 19% growth in 1QFY99. But its profits logged in a 33% growth, showing signs of improving margins. So it’s showing has been decent.

But there are some concerns. Lately, the company has again been dabbling in diversifications, like its proposed foray into life insurance (in partnership with US insurance company Allstate). Dabur is entering processed milk segment via its joint venture company Dabon. The company has also downgraded its earnings estimates and has stated that it will be unable to achieve the sales target of Rs 20 bn by FY2003 ( FY2000 turnover = Rs 10.8 bn).

However, such issues notwithstanding, the company’s presence in a niche industry of ayurveda products, strong brands, and diverse product portfolio, backed by strong research, serves as an entry barrier for new entrants and is difficult to replicate. One should take into account Dabur’s extensive distribution reach (over 600,000 retailers) in India. Moreover, the company’s management looks committed to improving the company’s core operations by getting out of low margin businesses and pruning the debt burden.

Bottomline, it is time for a relook.

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