Dabur International margins surprise - Macquarie Research,

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Dabur
International margins surprise
Event
 Dabur reported 2Q FY3/11 consolidated sales growth of 14.7%YoY and PAT
growth of 15.4%. Reported PAT was marginally ahead of our expectation. Key
highlights of the result were a 700bp improvement in international EBITDA
margins and 12% volume growth in the domestic business. We maintain our
Outperform recommendation and target price of Rs118.
Impact
 The 15% sales growth driven by strong volume. Domestic business grew
by 13%YoY, of which consumer care business grew by 14% and consumer
health grew by 14.7%. Volume growth for the domestic business was 11%.
International business grew by 19%, almost entirely driven by volume growth.
 Strong growth across consumer care categories. Consumer care sales
growth of 14% was led by 43%, 30%, 21% and 10%YoY growth in home care,
health supplements (driven by Glucose and Chyawanprash), foods and skin
care categories, respectively. However, intense competitive action by HUVR
and P&G led to 14% sales de-growth in the shampoo category.
 EBITDA margin expanded despite high raw material inflation. EBITDA
margin expanded by 41bp YoY to 21.7%, despite a 195bp increase in raw
materials, as this was offset by 170bp and 54bp declines in advertising and
staff expenses, respectively. International EBITDA margins expanded by
700bp YoY to more than 25%, much higher than domestic margins. As
international business continues to grow at a faster rate than domestic,
consolidated margins should improve further.
 New initiatives to accelerate growth. Dabur Chyawanprash was launched
in new mango and orange flavoured variants, which led to category growth of
50% in 1H FY11. Fem Gold Crème Bleach was introduced to target the fastergrowing
premium segment. Odomos Oil, a mosquito repellent, was launched
to target rural markets. Dabur has launched 50 paisa sachet of Vatika
shampoo to address sharp declines in sales due to heightened competition.
 Hobi acquisition expected add 3% to FY11 sales. Dabur concluded the
acquisition of Hobi Kozmetik on 7 October, and post-acquisition integration is
under way. The acquisition is expected to be earnings-neutral in FY11, as
interest cost will offset profits from Hobi. We think the acquisition will have
greater impact on earnings next year, when Hobi’s products will be launched
in new markets.

Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs118.00 based on a DCF methodology.
 Catalyst: Sales and earnings growth momentum and M&A.
Action and recommendation
 We maintain our Outperform rating with a target price of Rs118, as strong
sales and earnings momentum continues.