Angel Broking - Buy Dabur India with a Target Price of Rs. 114

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Dabur India – 3QFY2011 Result Update

Angel Broking maintains a Buy on Dabur India with a Target Price of Rs. 114.

Dabur posted modest set of numbers for 3QFY2011. On a consolidated basis,

while top-line came in below our estimate at 16.6% yoy primarily driven by

volume growth, earnings also registered lower-than-estimated growth of 10.9%

yoy though partially aided by higher other income. Dabur recorded margin

expansion of 41bp yoy, despite flat gross margins and the cut in ad-spend (down

210bp yoy) also cushioned the margins. We maintain a Buy on the stock.

Volume growth steady in double-digits: Dabur posted modest growth in top-line

of 16.6% yoy to `1,080cr led primarily by volumes, which grew by 10% yoy. In

terms of segmental performance – CCD registered a growth of 13.8% yoy, CHD

grew 13.0% yoy and IBD posted a growth of 14.2% yoy for the quarter. On the

operating front, margin increased by 41bp yoy to 19.4% resulting in a modest

19.2% yoy growth in EBITDA to `209.5cr. Earnings registered a modest growth of

10.9% yoy to `154.4cr despite the 229bp rise in tax rate, partially aided by

margin expansion and higher other income.

Outlook and Valuation: Over FY2010-12, we expect Dabur to post CAGR of

25.7% in top-line aided by steady volume growth in its core CCD categories of

hair care, skin care and foods coupled with robust growth in international

business. We model in 20% yoy growth from the international business (from our

previous 24% yoy contribution, after factoring in the Egypt crisis), contributing

`890cr to revenue in FY2011. We expect OPMs to sustain at ~18% levels, after

factoring in the loss due to the Egypt crisis, higher input cost and lower operating

leverage. We have modeled in healthy 23.9% CAGR in earnings aided by robust

top-line and consistent margins. At the CMP of `93, the stock is trading at

attractive valuations of 18.1x FY2012E revised EPS of `4.4. Hence, we maintain a

Buy on the stock, with a revised Target Price of `114 (`121).

Steady growth in top-line led by volume growth

Dabur posted a modest growth in top-line by 16.6% yoy to `1,080cr (`925.8cr) on a

consolidated basis led primarily by volumes, which grew 10% yoy. In terms of

segmental performance – CCD registered a growth of 13.8% yoy and CHD grew

13.0% yoy during the quarter. Within CCD, the health supplements category

reported 12.7% growth led by strong demand for Chyawanprash, which grew 15.5%

during the quarter, oral care grew 9.4%, home care portfolio ended the quarter with

24.2% growth aided by sustained demand for Odomos range of mosquito repellants,

Sanifresh and Odonil air fresheners, foods also registered a robust 42% growth

during the quarter, while the digestives and baby care business grew by 11.3%.

The international business registered a growth of 14.2% for the quarter, led by robust

performance in GCC, Egypt, Nigeria, Levant and North African markets. Shampoos,

hair creams and toothpastes were the key growth drivers in the international markets.

Earnings growth in-line with estimates

Dabur’s reported earnings for the quarter on a consolidated basis registered a

modest growth of 10.9% yoy to `154.4cr (`139.3cr) despite the 122bp rise in the tax

rate, partially aided by margin expansion and higher other income (up 35.9% yoy).

Gross margins flat, OPM cushioned by ad-spend cut

On the operating front, Dabur posted expansion in margin by 41bp yoy to 19.4%

(19.0%) resulting into a growth of 19.2% yoy in EBITDA to `209.5cr (`175.8cr).

While gross margins remained flat on account of input cost pressures and limited

price hikes, cut in ad-spend (down 210bp yoy), lower staff costs (down 51bp yoy)

and reduction in other expenses (down by 62bp yoy) aided margin expansion.

Investment Rationale

􀂄 Niche positioning to drive consistent growth: Dabur’s niche positioning based on

its ayurvedic/herbal positioning offers it an attractive and unique proposition in

terms of product portfolio. Moreover, a well-balanced and diversified portfolio

across high-growth categories like skin care, home care and foods coupled with

a strong rural distribution network places Dabur in sweet spot in terms of

growth. We model in robust 25.7% CAGR in revenues over FY2010-12 with

health supplements, skin care, home care and foods leading the growth.

􀂄 Crisis in Egypt reflects in our number, margins to sustain at ~18%: We expect

Dabur to sustain margins at ~18% levels aided by: 1) strong pricing power

(Dabur has taken ~5% price hikes in latter part of 1QFY2011 and future price

hikes negating effects of input cost inflation cannot be ruled out), 2) diversified

input mix and low dependence on oil derivatives, 3) improving profitability in

high-growth international business (reflected in last two quarters), and 4) low

dependence on Egypt (~3% to revenues), witnesses high growth in North Africa

and Nigeria. We model in 20% yoy growth from international business,

contributing `890cr to revenues in FY2011.

Outlook and Valuation

Over FY2010E-12, we expect Dabur to post CAGR of 25.7% in top-line aided by

steady volume growth in its core CCD categories of hair care, skin care and foods

coupled with robust growth in its international business. We expect Dabur’s OPMs to

sustain at ~18% levels, after factoring in the loss on account of the Egypt crisis,

higher input cost and lower operating leverage. We have modeled in a healthy 24%

CAGR in earnings aided by robust top-line growth and consistent margins. At the

CMP of `93, the stock is trading at attractive valuations of 18.1x FY2012E revised

EPS of `4.4. Hence, we maintain a Buy on the stock, with a revised Target Price of

`114 (`121).