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Daburís Fem Care acquisition: Our view - Views on News from Equitymaster

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Daburís Fem Care acquisition: Our view
Nov 26, 2008

Dabur India acquired 72.15% stake in Fem Care Pharma (FCPL) on November 21, 2008 for Rs 2.04 bn in an all-cash deal. In this article, we shall analyse the finer points of the deal and how this acquisition benefits Dabur going forward. About Fem Care Pharma
Promoted in 1982, Fem Care Pharma (FCPL) is a market leader in the fairness bleach category and has a strong market position in hair removal and liquid soap category. A listed player, the company is best known for its ĎFemí brand. Its other brands include Oxybleach cream, Botanica anti-ageing cream, Stratum colour protecting hair conditioners, SAKA menís bleach and Bambi fabric softeners. In the bleach segment, it is the leader in terms of tonnage across the globe. It has a distribution network covering 0.1 m retail outlets and 25,000 parlours directly. FCPL has manufacturing facilities in Nasik and Baddi (HP). It also exports products to UAE, Yemen, Oman, Maldives, Mauritius, Malaysia, Sri Lanka, Bangladesh, Myanmar and Nepal. The company also owns the ĎJaqulineí brand (100% subsidiary) which markets women care products (bleach and hair removing creams) in US and Middle East. FCPL has a specialty chemical division which is proposed to be hived off before completion of the deal with Dabur.

What is in the deal for Dabur?
The acquisition would allow Dabur an entry into the high-growth skin care market with an established brand name. It would also enable Dabur to extend the brand into newer and related skin care categories (see table below). Further, FCPLís parlour network can be leveraged for promoting Daburís personal care portfolio. FCPL earns about 20% to 25% of its revenues from parlour sales. Dabur can extend its Vatika hair oil and new launches in Ayurvedic skin products to the parlour network. It will also provide cost synergies and broaden the Daburís product portfolio, enabling it to further capitalise on the emerging opportunities in domestic and international markets. Further, given high loyalty in these categories of products, Dabur would stand to gain. Dabur can also expand FCPLís products in new regions and launch product variants.

The potential
Categories Mkt size (Rs m) Growth rate (%) Players and market share
Bleach 850 15 Fem (60%), Jolen (15%), Ayur (7%)
Hair removal 1100 22 Veet (30%), Anne French (35%), Fem (7%)
Liquid soaps 500 25 Lifebuoy, Dettol
(Source : Dabur)

Dabur currently is present in the skin care segment through its Gulabari brand. It will be launching new products / variants under this brand in the coming quarters. The company has started developing skin care products under the Ayurvedic segment. With acquisition of FCPL, Dabur would be able to extend its skin care segment across price points, making it a dominant player.

What the numbers say?
FCPL earned revenues of Rs 938 m and Rs 545 m for FY08 and 1HFY09 respectively. These account for 4% of Daburís consolidated revenues. On the operating margin front, FCPLís margins stood at 26.1%, at the end of 1HFY09 higher than Daburís margins (17.3%). During FY08, FCPL had incurred higher ad spends for its launches; hence the margins were lower at 16%, which improved in 1HFY09. Dabur expects the margins to be in the range of 16% to 26% going forward. The profits account for 5.5% of Dabur net profits. The RONW for FY08 stood at 28.3%, while D/E is 0.6. While the FCPL would form a small part of Daburís topline, higher margins would benefit. However, the return ratios are lower than that of Dabur.

The deal valuation
Dabur acquired 72.15% in Fem Care Pharma for Rs 2.04 bn in an all-cash deal. The promoters of FCPL will pay back Rs 210 m to Dabur for the speciality division, a foreign subsidiary and a property. Dabur will make an open offer for an additional 20% shares in the company as required under the takeover regulation. The transaction ascribes a price per share of Rs 800, which translates into an equity valuation of Rs 2.82 bn.

The acquisition is funded through the internal accruals. When the news about the acquisition had arrived in mid October, FCPLís shares traded at Rs 330. The deal price is higher by 140%. Dabur expects the payback period to be around 5 years. FCPL will initially operate as a subsidiary and would later be merged.

Dabur had acquired Balsara at price/sales ratio of 0.7 times. If one were to look at deals by other companies in a similar space, Marico had acquired Nihar at 1.8 times sales and the consumer division of Enaleni Pharmaceuticals at 1 times sales. Daburís FCPL acquisition is valued at 2.2 times its FY08 sales and 1.9 times its annualised 1HFY09 sales. The acquisition is expensive in our view. However, the company is bullish on FCPL, especially after its success in integrating Balsara. Also as per the management, new products take more time to get successful than an existing brand. Further, FCPL being a niche player is likely to see higher margins.

Dabur expects FCPL to contribute 4% to its revenues in the current fiscal. The management expects FCPLís products to grow at a faster rate than Daburís portfolio. However, to attain significant scale, it would take time. Fem would join the ranks of key brands of Dabur (Dabur, Vatika, Real and Hajmola). Dabur also expects to improve FCPLís sourcing, media buying and distribution cost. Once both the distribution channels are integrated, the cost would go down, thus aiding margin expansion. In the end, how efficiently and quickly Dabur is able to integrate FCPL with itself - will be the key to the success of the merger.

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