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Dabur: The ‘Balsara’ kick… - Views on News from Equitymaster
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Dabur: The ‘Balsara’ kick…
Oct 24, 2005

Introduction to results
Ayurvedic major, Dabur, announced its second quarter and half yearly results a short while back. The company reported an enthusing bottomline growth backed by margin expansion. Dabur has continued to benefit from the improvement in the overall economic scenario, which is visible in the strong revenue growth. Thus, with continued robust performance during the second quarter, the company’s half-year results have been rather impressive.

Consolidated picture…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 3,710 4,675 26.0% 7,154 8,822 23.3%
Expenditure 3,119 3,870 24.1% 6,224 7,525 20.9%
Operating profit (EBDITA) 591 805 36.3% 930 1,297 39.5%
Operating profit margin (%) 15.9% 17.2%   13.0% 14.7%  
Other income 21 38 79.5% 39 56 41.6%
Interest 34 47 36.4% 64 87 36.1%
Depreciation 78 84 8.1% 150 160 6.2%
Profit before tax 500 713 42.5% 755 1,107 46.5%
Tax 56 85 52.5% 90 135 49.9%
Minority Interest (10) 17   (17) 21  
Profit after tax 434 644 48.5% 649 993 53.0%
Net profit margin (%) 11.7% 13.8%   9.1% 11.3%  
Effective tax rate (%) 11.2% 12.0%   11.9% 12.2%  
No. of Shares (m) 285.7 286.5   285.7 286.5  
Diluted earnings per share* (x)   9.0     6.9  
P/E ratio (x)         25.3  
(* 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) contributed 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 2QFY06?
Beguiling topline: The company reported an impressive topline growth, driven by pick-up in key categories in the consumer care division, consumer health care (up 32% YoY), foods (48% YoY) and its international business, which registered a healthy 20% YoY growth. Further, Balsara which the company acquired in FY05, also displayed a growth of over 26% YoY. The company’s hair care division grew by 8% YoY, with its main brand Anmol growing over 37% YoY. However, shampoos continued to display dismal performance and grew by a mere 3% in the quarter under review. Baby and skin care and home care also registered good growth during the quarter. However, contribution from Chyawanprash was negligible as it is mainly a winter product.

It must be recollected that, with the restructuring of the Consumer Health Care Division (CHD) completed, this division continues to generate encouraging scale and momentum for its range of Ayurvedic medicines and OTC portfolio. Growth from Oral care (22% of revenues) was marginal due to a pipeline correction and decline in its toothpowder category. The main kicker for this segment came from Balsara, with growth in its key brands Babool and Meswak, which stood at 39% and 96% YoY respectively.

Overseas kicker: The international business grew by 39% YoY, which includes exports of Balsara products. It’s Egyptian and Bangladeshi subsidiaries continue to display strong growth and grew by 58% and 51% YoY respectively in the first half of the fiscal. It must be noted that brands like Amla hair oil and Vatika shampoo lead the growth in International markets. It must also 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 GCC countries, growth rate are stabilizing at around 25% YoY. Overall, exports have displayed a 20% YoY growth.

Consolidated cost break-up
as a % of net sales 2QFY05 2QFY06 1HFY05 1HFY06
Total Cost of goods 44.4% 41.5% 44.8% 42.3%
Staff Cost 7.0% 7.1% 6.8% 7.3%
Advertisement & Promotion 10.2% 11.5% 11.2% 12.0%
Other Expenditure 22.5% 22.7% 24.2% 23.7%
Total Expenditure 84.1% 82.8% 87.0% 85.3%

Topline continues to be beaten: Yet again, bottomline continued to outpace topline by yards, which was possible due to savings from increased in-sourcing and cost efficiencies in sourcing key raw materials like edible oils and honey, which led to the cost of production, being 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 49% during the quarter

Balsara takes a u-turn: Dabur managed to turn Balsara profitable in this quarter, and the company reported a profit of Rs 73 m on revenues of Rs 920 m. Rationalizing costs and integrating the processes and products of Balsara in line with itself resulted in the turnaround. 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. Dabur is poised to benefit further going forward as it restructures Balsara’s brands and pushes them through his distribution chain.

Icing on the cake: The board has declared a bonus issue in the ratio of 1:1 (1 share for every share held), along with an interim dividend of Rs 1.50 per share. In our view, this is a big positive as it shows investor friendliness on the part of the management.

Over the past few quarters…
  2QFY05 3QFY05 4QFY05 1QFY06 2QFY06
Sales growth (YoY) 13.3% 10.8% 15.1% 20.4% 26.0%
OPM (%) 15.9% 13.8% 14.6% 11.8% 17.2%
Net profit growth (YoY) 28.2% 41.8% 60.5% 61.3% 48.5%

What to expect?
At the current price of Rs 175, the stock is trading at a price to earnings multiple of 17 times our estimated FY08 earnings and market cap to sales of 2.2x. The company's September 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 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. In our view, Dabur has one of the best growth stories in the FMCG space.

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