DABUR -Shampoo the only black sheep; growth to rebound::Edelweiss

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􀂃 PAT bang in line; Sales marginally lower than expected
Dabur’s Q2FY11 revenues increased 14.7% Y-o-Y to INR 9.73 bn (our estimate
INR 9.90 bn). Net profit growth of 15% Y-o-Y to INR 1.60 bn (bang in-line with
our estimate of INR 1.60 bn) was impacted by increase in tax rate, which
jumped 120bps Y-o-Y to 18.2%. Volume growth was ~10% Y-o-Y in the
domestic business.
􀂃 Margins pressure offset by lower ad spends
The company’s EBITDA grew 15.8% Y-o-Y to INR 2.03 bn as EBITDA margin
expanded 20bps Y-o-Y to 20.9%. COGS increase of 210bps was offset by lower
advertising and sales promotion (A&P) spend (170bps) and lower staff costs
(50bps). Dabur was expecting inflation to moderate, which has not happened.
The price hikes were not sufficient to offset the cost inflation.
􀂃 Decline in shampoo(4% of Dabur sales) contained
Aggression from Hindustan Unilever (HUL) took a toll on Dabur as high intensity
of consumer promotions and media spends led to contraction of shampoos.
Dabur’s shampoo business was also impacted by the high base effect with
extraordinary high growth recorded in H1FY10. Decline in shampoo was
contained from -17% de-growth in Q1FY11 to -14% de-growth in Q2FY11. The
company expects margins to be under pressure in the shampoo business in
coming quarters and confirms that this is the only business which is facing
structural issues.
􀂃 Outlook and valuations: Strong volume growth; maintain ‘BUY’
Although most categories faced a slowdown in Q2FY11, we believe it was
because of a combination of reasons like prolonged monsoon, high base effect,
and delayed onset of the festive season. Disruption because of Common Wealth
Games was also one of the reasons for lack luster growth in Delhi.
We are, however, confident of the trend reversal in Q3FY11. Although pressure
on margins will sustain, we believe, any correction in the stock will be a good
buying opportunity for long-term investors. At CMP of INR 100, the stock is
trading at P/E of 29.4x and 24.4x on FY11E and FY12E, respectively. We reiterate
our ‘BUY’ recommendation on the stock and rate it ‘Sector
Outperformer’ on relative returns basis.