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Dabur India: Conference call extracts - Views on News from Equitymaster

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Dabur India: Conference call extracts
Oct 12, 2006

We had a conference call with the management of Dabur India recently to understand the growth prospects of the company going forward. Here are the key takeaways.

About the company
Dabur is Indiaís fourth largest FMCG company with interests in health care, personal care and food products. The companyís name is generic to Ďayurvedicí 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 Balsaraís business in FY05 for a consideration of Rs 1.4 bn.

Overview of the business segments
Consumer care: This is Daburís largest business and includes a number of product categories Ė hair oils, shampoos, oral care, health supplements, digestives, baby products and skin care. The division had a low growth rate as compared to other divisions, primarily because this division includes a number of legacy products, which are fairly mature and hence structurally offer a slower growth rate. However, the management expects growth to accelerate going forward due to the Balsara acquisition. Balsara business includes the faster growing home care business. With brands like Promise, Babool and Meswak in the oral care segment, Odomos mosquito repellant and household care brands like Odonil, Odopic and Sanifresh, the home care and oral care segments are expected to grow faster. The home care segment would be a driver in the coming quarters given changing consumption habits and growing awareness of home care products. Daburís legacy brand, Chyawanprash, also will be in focus. Going forward, the company would not be relying upon the single offering to fuel growth, but is looking to spin off a lot of variants in Chyawanprash for adults, for children and for diabetics. The management opines that the aggregate growth of the category would continue to remain very good even if the mother brand does not grow at a high pace, as it is reducing its dependence upon the mother brand, de-risking the whole category.

Consumer health care business: The company has a positive view on this division and expects growth rates to sustain at least 20% for the next few years. Dabur is focusing on new product launches, expanding distribution, reaching out to more chemists and is opening more Ayurveda centers.

Foods: Foods division has been Daburís success story. This division includes predominantly fruit juices and a small segment of ready-to-cook pastas and soups. The management expects the growth rate to remain over 30% in the coming years. Fruit juice is a nascent category with low penetration. With growing income levels, changing lifestyles and greater focus on health, demand for fruit juices is expected to grow going forward. The division with a turnover of Rs 1.9 bn in FY06 is expected to touch Rs 3 bn in the next two years and Rs 5 bn by FY10. While the mother brand Real has already crossed Rs 1 bn in sales, the company is aiming for both Real Activ and Coolers to be brands worth Rs 1 bn by 2010.

International division: Daburís international operations are spread across Middle East, Bangladesh and Pakistan. Dabur is also increasing its presence in the US and UK, but has seen limited success so far in these markets. Overall, international turnover has grown at 14% YoY in FY06 and management expects this growth rate to sustain given increasing product categories and greater resources being invested in these markets.

On the margin front: The management is not very worried about the margin story. The challenge in front of it would be to maintain very robust top line growth, and that is really where Daburís entire focus is. If the company does not take up the product prices there would be some erosion in terms of gross margins largely on account of inflation. But the company has the headroom to increase the prices, which would neutralise the effect.

Capex: The company does not have any major capex plans currently. However, it is open to acquisitions going forward. It has also planned to raise upto US$ 200 m through issue of foreign securities to be used for expansion and acquisitions.

What to expect?
At the current price of Rs 139, the stock is trading at a price to earnings multiple of 34.7 times its trailing 12 months earnings, which we believe is expensive. The company is very buoyant on the international, foods and home care segment. It is also looking out for acquisitions and has made plans to raise the necessary funds. However, despite all the growth potential inherent in the companyís current strategy, investors need to practice caution with respect to valuations.

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