dabur india limited research - business...

6

Please see the end of the report for disclaimer and disclosures. -1-

DABUR INDIA LIMITED

RESEARCH

EQUITY RESEARCH August 4, 2008

Finding ways to maintain margins

During Q1’09, Dabur and other FMCG companies were adversely impacted

by the inflation-driven cost escalation. As a result, EBITDA margin and net

margin decreased by 78 bps and 71 bps, respectively. Although the

Company is investing heavily to improve its operations, macro-level

headwinds remain strong, and can limit the positive impact of the various

cost measures being undertaken by the Company.

Revenues maintain the growth momentum: Net sales grew by 16% yoy to

Rs. 6.04 bn, driven by an 11% volume growth. Core Consumer Care (CCD)

grew by 13.3%. We believe the Company’s constant efforts to bring in new

variants and give a face lift to its products will help it to grow its revenues at a

CAGR of 14.2% during FY08-10.

Margins to remain under stress: The Company has admitted that gross

margins may fall by around 80~100 bps for FY09 due to its inability to fully

pass on the burden of escalating raw material costs to the consumers.

Besides, we believe that higher fuel and advertising costs will drag down

EBITDA margin to around 16% for FY09. Although the Company has

announced its decision to exit the loss-making soap business and reduce its

retail outlet plans to 5-6 stores for FY09 instead of 8-10 outlets, the upside on

margins will be visible only in FY10.

Rich valuation leaves limited upside: Dabur’s stock is trading at a high

premium at 26.2x for FY09E EPS, compared with its peers at 18.6x. Besides,

our DCF model gives a value of Rs. 101. Therefore, we see limited upside

potential in the stock and reiterate our Hold rating on the stock.

Dabur India Limited Hold

Key Figures (Consolidated)

Quarterly Data Q1'08 Q4'08 Q1'09 YoY% QoQ%

(Figures in Rs. mn, except per share data)

Net Sales 5,208 6,065 6,040 16.0% (0.4%)

EBITDA 792 978 871 10.0% (10.9%)

Net Profit 544 695 588 8.1% (15.4%)

Margins(%)

EBITDA 15.2% 16.1% 14.4%

NPM 10.4% 11.5% 9.7%

Per Share Data (Rs.)

Adjusted EPS 0.63 0.76 0.67 6.7% (11.8%)

RESULTS REVIEW

Share Data

Market Cap Rs. 79.5 bn

Price Rs. 91.95

BSE Sensex 14,577.87

Reuters DABU.BO

Bloomberg DABUR IN

Avg. Volume (52 Week) 0.3mn

52-Week High/Low Rs. 134 / 72

Shares Outstanding 865.0

Valuation Ratios (Consolidated)

Year to 31 March 2009E 2010E

EPS (Rs.) 3.5 4.2

+/- (%) (0.4)% 18.4%

PER (x) 26.2x 22.1x

EV/ Sales (x) 3.0x 2.6x

EV/ EBITDA (x) 18.6x 15.8x

Shareholding Pattern (%)

Promoters 71

FIIs 11

Institutions 11

Public & Others 7

Relative Performance

30

60

90

120

150

180

Au

g-0

7

Se

p-0

7

Oc

t-0

7

No

v-0

7

De

c-0

7

Ja

n-0

8

Fe

b-0

8

Ma

r-0

8

Ap

r-0

8

Ma

y-0

8

Ju

n-0

8

Ju

l-0

8

Au

g-0

8

DABUR Rebased BSE Index

6


DABUR INDIA LIMITED

RESEARCH


Result Highlights

• Net sales for Q1’09 grew 16% yoy to Rs. 6.04 bn. The 13.3% growth in

the consumer care business and a robust growth in the international

business contributed significantly to the Company’s overall growth.

• EBITDA margin for the quarter declined to 14.4% on account of a high

raw material and employee costs.

• Adj. net profit for the quarter grew 8.1% to Rs. 588 mn; the subdued

growth in net profit was primarily due to the higher tax rate of 15.2% in

the current quarter, compared with 13.9% in the base year.

Segmental Highlights

Consumer Care Division (CCD), which contributed approximately 76.6% to

the total revenue, grew by 13.3% yoy to Rs. 4.7 bn with a fair performance

across all categories. The hair care category grew by 15%, dominated by

Dabur Amla hair oil and the new mustard oil variant that has also been

received well in the market. The Vatika brand too is getting a good response

for its new conditioners. Meanwhile, oral care grew by a modest 5%, led by a

strong performance of the red tooth paste. The category showed modest

results because of the repackaging of Meswak and Babool and the write-off

of the old stock. However, due to higher material cost, EBIT grew by a mere

10.6% to Rs. 1.1 bn and margin dipped 61 bps to 24.3%.

Adj. net profit declined due to significantly higher taxes

Cost AnalysisPeriod

as % of Net Sales Jun-07 Mar-08 Jun-08 yoy% qoq%

Raw materials 45.3% 40.5% 43.7% -1.5% 3.3%

Purchase of traded

goods10.8% 3.4% 14.1% 3.3% 10.7%

Advertising Exp. 13.3% 12.3% 13.5% 0.2% 1.2%

Employee Exp. 8.6% 8.8% 8.8% 0.2% 0.0%

Other Exp. 14.1% 16.7% 13.6% -0.5% -3.1%

Source:Company, Indiabulls Research

Inc/Dec

6


DABUR INDIA LIMITED

RESEARCH


Consumer Health Division (CHD) grew 24.9% yoy to Rs. 401.2 mn after a

shallow performance during the last few quarters. The Health Supplements

business grew by more than 19%. The Company has received a fair

response to the promotions of its Ayurvedic portfolio. It is also expanding its

product portfolio with plans to launch an ayurvedic skin care range by the

third quarter. Dabur India had forayed into the skin care market last year with

the launch of rose-based products under the 'Gulabari' brand name.

Consequently, the segment’s return on capital employed went up to 18.4%

during the quarter, compared with 15.5% for the corresponding quarter last

year. Thus, we are optimistic in our estimates on the proposed new

investments in the segment.

International Business recorded a robust growth of 40% yoy during the

quarter. The Company has been receiving an improved response from

Egypt, the Middle East, and other African nations. The division continues to

maintain a strong growth momentum with significant investment in the

branding and distribution network.

Health & Beauty (H&B)’s health, wellness, and beauty chain New-U was

launched in Q3’07. Since then, four more stores have been opened, bringing

the total to 7 stores. The management has revised its plans of opening

around 8-10 stores to 5-6 stores by 2008 end in order to capitalise on the

downtrend in the rentals.

Key Events

• The Company plans to invest over Rs. 2.5 bn in the next two years to

ramp up capacities. In addition to a Rs. 1.1-1.2 bn brown field expansion

this fiscal, Dabur would set up a Rs 1.3-1.5 bn green field plant in the

next fiscal in one of the hill states to avail fiscal incentives.

• Stepping up its efforts to curb counterfeit products in the market, Dabur

and local authorities busted a racket involving the manufacture of

spurious Dabur Amla Hair Oil in the national capital region. The raids

were conducted in Delhi, Kolkata, and Agra amongst other cities. Goods

worth more than Rs. 10 mn were seized through these raids.

Segment's contribution to Revenue

CHD

7%Food

14%

IBD

3%

CCD

76%

Source:Company Data

6


DABUR INDIA LIMITED

RESEARCH


Key Risks

The main upside risk to our Hold rating is better growth across key

categories, driven by pricing power. However, a sustained price war is a

downside risk as it might further erode margins.

Outlook

After considering the Company’s consolidated performance and the

prospective growth plans, we expect net sales to grow at a CAGR of 14.2%

over FY08–10E. However, we maitain our EBITDA margin at 16% for FY09

because of higher advertising, fuel and material costs.

To tackle the cost problem, the Company is planning several initiatives to

protect its bottom line. Some of these initiatives are:

• An investment of more than Rs. 2.5 bn to develop brown field and green

field projects in hill states will enable the Company to benefit from the

MAT till 2020.

• Dabur has slowed down its retail expansion plans foreseeing a

downward trend in rentals. This should prevent the Company from

locking itself into high rentals.

• The Company intends to increase its prices in the second and third

quarter with a full-year guidance of 7-8% in order to maintain its growth

as well as to partially pass on the cost burden to the consumers.

• The Company has decided to exit the unprofitable soap business, which

has consistently shown poor performance.

Valuation

We have valued Dabur by using the DCF model and have arrived at a target

price of Rs. 101. For this, we have assumed 9% Rf, 14.6% WACC, and 5%

terminal growth rate. At the current price, the stock is trading at a forward PE

of 26.2x for FY09E and 22.1x for FY10E. When compared with its peers, we

conclude that the stock is trading at a high premium for FY09E EPS (26.2x

6


DABUR INDIA LIMITED

RESEARCH


for the Company comapred with 18.6x for its peers). Therefore, we see

limited upside potential in the stock and maintain our Hold rating.

Key Figures (Consolidated)

Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)

(Figures in Rs. mn, except per share data) (FY08-10E)

Net Sales 17,228 20,431 23,607 26,911 30,814 14.2%

Adj. EBITDA 2,866 3,497 4,187 4,296 5,042 9.7%

Adj. Net Profit 2,136 2,563 3,066 3,054 3,614 8.6%

Margins(%)

EBITDA 16.6% 17.1% 17.7% 16.0% 16.4%

NPM 12.4% 12.5% 13.0% 11.3% 11.7%

Per Share Data (Rs.)

Adj. EPS 2.47 2.94 3.53 3.51 4.16 8.6%

PER (x) 25.1x 32.3x 26.1x 26.2x 22.1x

Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666

6

-6-

DABUR INDIA LIMITED

RESEARCH


Disclaimer This report is not for public distribution and is only for private circulation and use. The Report should not be reproduced or redistributed to any other person or person(s) in any form. No action is solicited on the basis of the contents of this report. This material is for the general information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be considered as an offer to sell or the solicitation of an offer to buy any stock or derivative in any jurisdiction where such an offer or solicitation would be illegal. It is for the general information of clients of Indiabulls Securities Limited. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You are advised to independently evaluate the investments and strategies discussed herein and also seek the advice of your financial adviser. Past performance is not a guide for future performance. The value of, and income from investments may vary because of changes in the macro and micro economic conditions. Past performance is not necessarily a guide to future performance. This report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon as such. Any opinions expressed here in reflect judgments at this date and are subject to change without notice. Indiabulls Securities Limited (ISL) and any/all of its group companies or directors or employees reserves its right to suspend the publication of this Report and are not under any obligation to tell you when opinions or information in this report change. In addition, ISL has no obligation to continue to publish reports on all the stocks currently under its coverage or to notify you in the event it terminates its coverage. Neither Indiabulls Securities Limited nor any of its affiliates, associates, directors or employees shall in any way be responsible for any loss or damage that may arise to any person from any error in the information contained in this report. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject stock and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report. No part of this material may be duplicated in any form and/or redistributed without Indiabulls Securities Limited prior written consent. The information given herein should be treated as only factor, while making investment decision. The report does not provide individually tailor-made investment advice. Indiabulls Securities Limited recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. Indiabulls Securities Limited shall not be responsible for any transaction conducted based on the information given in this report, which is in violation of rules and regulations of National Stock Exchange or Bombay Stock Exchange.

dabur india limited research - business...

Documents