Dabur -In-line 3Q, but keep an eye on Egypt:: Macquarie Research

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Dabur
In-line 3Q, but keep an eye on Egypt
Event
 Dabur reported 3Q FY11 consolidated sales growth of 17%YoY and PAT
growth of 11%. Reported PAT was marginally ahead of our expectation. Key
highlights of the result were a 69bp improvement in consolidated EBITDA
margins despite a 265bp decline in gross margin. Domestic volume growth
was10% in 3Q. Reiterate Outperform.

Impact
 17% sales growth driven by 10% volume growth. Price growth in the
quarter was 4%, and inorganic growth was 3% (Hobi). The domestic business
grew by 14%YoY, of which both the Consumer care and Consumer health
divisions grew by 14%YoY. International business grew by 14%YoY, while
growth in constant currency was 19%.
 14% growth in consumer care business. Food (+42%), Home care
(+24.2%), Skin care (+18%), Health supplement (+12.7%) and toothpaste
(+15.2%) were the key drivers for consumer care. However, the shampoo
business was the key drag for the segment, which declined 30% due to strong
competitive action by the multinational players (HUVR, P&G and L’Oreal).
 International margins continue to surprise. Dabur’s EBITDA margin
expanded 69bp to 19.9% in 3Q despite a 265bp contraction in gross margins.
While the domestic business’ margins remained flat, international margins
expanded 364bp. Gross margin contraction was offset by 213bp and 120bp
declines in advertising & promotion and other operating costs, respectively.
We expect Dabur’s A&P expenditures to increase in coming quarters, due to
competitive intensity and Dabur’s new product launches.
 Events in Egypt may impact international business in 4Q. Over the last
two quarters, the international business was the key lever for Dabur’s margin.
Within international, North Africa and Egypt were the fastest-growing regions.
Recent political turmoil in Egypt has disrupted production and supply since
last week, and sales are likely to be impacted in the current quarter. Egypt is
the major supply hub for the MENA region, which contributes around 8–10%
of its sales.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs118.00 based on a DCF methodology.
 Catalyst: Political stabilization in Egypt
Action and recommendation
 Outperform maintained. We maintain our Outperform rating with a target
price of Rs118, as strong sales and earnings momentum continues. We
believe the company has done a commendable job by maintaining its margin
despite significant raw material cost pressure.