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Dabur: Conference call extracts - Views on News from Equitymaster

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Dabur: Conference call extracts
Dec 10, 2010

We recently attended the 2QFY11 conference call of Dabur. The company performed well during the quarter. Top line of the company grew by 15% YoY on the back of strong volume growth. Operating income grew by 17.3% YoY in spite of higher raw material costs. This was because the company curtailed its advertisement expenditure. Bottom line however, grew slower than operating income. The reason for this was higher effective tax rate during the quarter.

The key extracts are given hereunder:

Hair Oil business: Hair oil business grew by only 7.1% YoY during the quarter. According to the company, it is not a structural problem. Instead it was a result of the festival season being late during the year. Moreover, floods and a longer than normal monsoon period was detrimental to off take of hair oil. Going forward, the company expects the hair oil business to pick up. But the company is cautious as it expects this business to be volatile. The combined market share for the company's entire hair oil portfolio is 8.5%.

Shampoo business: Sales of the shampoo business fell by 14% YoY during the quarter. This according to the company was a result of a high base effect. The business grew by close to 40% YoY for the corresponding quarter last year. Furthermore, high competitive activity which was disruptive in nature stemmed growth of the category. Management of Dabur believes that the dynamics of the shampoo market have changed. However, by 4QFY11, the company would have a concrete strategy in place which would put this business back on a growth trajectory. However, this growth would come at a price. The margins would be lower unless the competitive activity reduces. In fact Dabur expects gross margins to be lower by 500 to 1000 bps for this business. Shampoo category, while holding a lot of potential is bound by the fact that the price for sachets which make up a substantial chunk of volumes is capped at Re 1.

Gross margins: Dabur took a price increase during 1QFY11. In spite of this, the gross margins contracted by 210 bps during the quarter. This was due to the company misreading the signs of inflation. While Dabur expected inflation to moderate, it in fact hardened. The price increases taken by the company were muted as a result of high competitive intensity. It was this double whammy for Dabur that resulted in margin contraction. The main raw materials which impacted the company are LLP, coconut oil, edible oil, menthol and gold. To protect its margins, the company is now looking at substituting products like LLP and edible oil blends with lower cost blends. This is because the company expects high food inflation to continue for atleast another 2 quarters.

Skin Care Business: Dabur was disappointed with the performance of Fem. The brand grew by 11% YoY during the quarter while the company's internal target was 15% YoY. However, Dabur is confident that the brand will end the year with a 15% YoY growth. During the quarter, the brand saw delays in some product launches. This was the primary reason for the brand underperforming. Dabur remains confident on the profitability and growth potential of Fem. This is on the back of the fact that beauty care regime is getting traction in the smaller towns where earlier on it was considered to be not very common. With ample head room to grow, Fem is expected to perform well. On Uveda, the company is in the process of changing its marketing strategy. From marketing using mass media, the company is now marketing through store promotion and in shop activities. Dabur is also expanding the range of products under this brand. This change in the business model would accelerate the growth of the brand.

Rural growth: Contribution of rural sales to Dabur's overall sales has inched up. It may be noted that Dabur defines rural markets as towns having a population of 50,000 and below. For the September quarter, about 50% of Dabur's sales came from rural markets. Dabur's strategy has been to build the last mile connectivity to the rural markets. This distribution network in terms of infrastructure, supply chain and IT would help Dabur when the rural economy grows and the purchasing power in the rural pockets increases.

What we expect?

At a price of Rs. 96, the stock is trading at 22.6 times our estimated FY13 earnings (RPro subscribers click Here. The company has performed well on the back of its CCD and international business. Health supplements, home care, foods, oral care and digestives divisions have seen good traction. However, at these levels, we feel that growth from a 2-3 year perspective is priced in the stock. We therefore advise our subscribers to be cautious while investing in this counter.

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