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Dabur India: The story behind the numbers is good - Outside View by Luke Verghese
 
 
Dabur India: The story behind the numbers is good

Brand Dabur

In the 125th anniversary of its founding, as brand Dabur, the management has gone ballistic through its annual report, over its achievements. But the comparative dates for the purpose of rating its achievements are between the base year 2000 and the latest completed accounting year! The company has been around as a corporate entity for the past 35 years having been brought to life in 1975. It may not be out of place to mention here that the company really got wings after the promoter management put in place a very professional set up, which largely included the exit of the family members from active management.

Largest home spun FMCG

Dabur is today anointed as India's largest home spun FMCG company. Its only other visible challenger to this crown, Nirma, lost the plot years ago. In between the expansion of its product portfolio, and the launch of new manufacturing capacities both within and without the country, Dabur has expanded its presence across 60 countries, with 19 manufacturing plants to boot. (However, if the international business division could crank up a turnover of only Rs 6 bn, then the company must be quite stretched, figuratively speaking, as its footprint extends to 60 countries around the globe. And, somehow, the group earned forex of only Rs 1.2 bn). The company is also busy acquiring brands to rapidly build up both size and competence. It acquired the Balsara brand in FY06 and the Fem Care brand in FY10. So far so good.

Its product line

Its current sizeable brand portfolio extends from Real juices, to Dabur Chyavanprash, Dabur Honey and Glucose D, the Vatika, Uveda and Amla range, the toothpaste brands Babool, Meswak and Dabur Red, and, Hajmola, Odomos, Gulabari, and, several over the counter healthcare products. These products are grouped under 3 strategic business units. The business units being, the Consumer Care Division, International Business Division, and, the Consumer Health Division. The three divisions currently account for 68%, 17.6%, and 8% respectively, of consolidated revenues. But for purposes of segmental results, the company has grouped its operations under 4 heads. The operations are clubbed under Consumer Care, Consumer Health, Foods, and, Others. Why it chooses to adopt so many convoluted routes to reveal its true colors is difficult to comprehend.

The HUL saga

This frenetic pace of growth reminds one of a similar mindset that enveloped the FMCG industry top gun, Hindustan Unilever, especially when it was operating under the wings of Susim Mukul Datta and then Keki Dadiseth. The latter went on record to state that the company was in the market to acquire brands. Today HUL is in the market, and for the second time at that, buying back its shares in the open market, in a desperate attempt to prop up its share price! One is not making any inferences here, but merely making a point. The fore-sighted management of Dabur however intends to double the group turnover to Rs 70 bn and profits 10 bn, four years hence in FY14.

Its sales dissected

For sure, the group's consolidated sales have clocked the highest percentile growth for the decade in FY10. Total revenues excluding other income growing 43% over that of the preceding year to Rs 34.2 bn. The sales push has been driven by growth in manufacturing, in traded sales, the value addition from its 11 subsidiaries, and in the contribution of its brand (Fem Care Pharma) acquired during the year. The subsidiaries collectively rang up sales of Rs 8.4 bn, but after deducting the inter-se transactions with the parent; their contribution to overall revenue was Rs 5.4 bn or 16% of total revenues. But the profit margins generated by the subsidiaries did not keep pace though.

The subsidiaries are a colorful bunch-in the manner of their spread of operations that is. The most interesting revelation is that Dabur has operations emanating out of Pakistan (which along with its operations in Nepal is disclosed as 'operations in neighboring countries' in the directors' report!). Dabur must rank as one of the few listed Indian companies brave enough to do so, and win the approval of the two governments to do so too. This subsidiary is called Asian Consumercare (Pak) Pvt. Ltd. But this operation accounts for nothing really, ringing in sales of Rs 181 m and recording a loss before tax of Rs 23 m. It even makes a tax provision on this book loss, so the loss after provision of tax is 28 m. A few of the other subsidiaries also appear to making tax provisions on book losses. (Some countries appear to have weird tax laws - on paper that is.)

The subsidiaries

Collectively, its biggest operations are out of the UAE, where it has three entities flogging brand Dabur. These three together also account for close to 50% of total sales generated by all the subsidiaries. But just one of the three, Dabur International, brings home the bacon with the other two having their bottom-line seeped in red ink. Individually, it is the Nepalese subsidiary which contributes the most, at 33% of all sales, but it does not make a dime for its troubles. The only other company of significance is Dabur Egypt ringing in 10% of all subsidiary sales and contributing healthily to profits too.

The operations based out of the UK and the USA is an embarrassment to say the least, and they appear to be around only for cosmetic purposes, and merely to add to the number of units in operation. All the subsidiaries barring H&B Stores appear to be under the umbrella control of Dabur International. The parent has grand plans for H&B Stores, the retail wing, but for the present, it is a gonner, what with losses exceeding its turnover. This company will most definitely be sucking up a lot of money before it turns operationally profitable. However, cumulatively its international operations have been a grand success going by the accumulated profits of Rs 598 m that the subsidiaries have generated to date.

Revving up for action

It is in the domestic sector that the company is really revving up for action. It is expanding manufacturing capacity at a fast clip. So much so that the fixed asset to turnover ratio is showing signs of strain on the one hand, and on the other, the market for what it produces is not able to grow fast enough to cater to the expanded facilities. The company also sees sufficient value in outsourcing finished goods and then flogging it to customers. So much so that the re-sale of bought out goods contributed to 17% of overall standalone sales, or Rs 4.9 bn in rupee terms. It also brought in a gross margin of Rs 972 m or a percentile return of 20%. The 5 items of traded goods that are bought out and sold are also produced in house, and then flogged in the markets. The biggest revenue earner is a Fruits, Nectars and drinks, closely followed by an item called 'Others'.

The most perplexing part of manufactured sales (as is in traded sales) is that the biggest contributor to income is an item called 'Others' with revenues of Rs 8 bn. No capacities or production details of this omnibus item is available in the annual report. (In the segmental results tabulation, the 'Others' category has revenues of only Rs 827 m and brings in very low margins. It probably does not make any money at the net level.) But of the 8 other items that are shown as being produced, the top dog is Hair Oils, ringing in sales of Rs 5.7 bn, followed by toothpaste with sales of Rs 4 bn. Next in line is Chyawanprash with sales of Rs 2.2 bn. All these 8 items have added substantially to capacity and hence the average utilization of capacity ranges from a high of 81% In the case of honey to a low of 25% for vegetable pastes. The capacity utilization of the three biggies averaged between 33% and 42%.

A tightly run ship

Inspite of the frantic expansion of capacities and seeking greater market share, the company is a very tightly run ship alright. Though its investments in its subsidiaries bring no dividend returns (it also makes do without any royalties), and its expansion of gross block is yet to bloom, the company was able to manage its working capital fund flow most admirably. With borrowings under strict control, interest costs are also minimized. It is also one of the few companies that I have studied which rolls large sums in the secondary markets and turns a large profit on the purchase / sale of securities.

All in all the company appears to be careening in the right path.

Disclosure: Please note that I am not a shareholder of this company

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:
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