Dabur - Long-term outlook remains positive ::: Macquarie Research

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Dabur
Long-term outlook remains positive
Event
 Dabur reported 4Q’FY11 results and hosted an earnings conference call. The
company reported 30% and 9% YoY sales and profit growth in 4QFY11,
respectively.

 Management emphasised the challenging international business environment
due to political issues in Middle East and North Africa (MENA) as well as raw
material cost pressure. Reiterate OP with a revised target price of Rs113.
Impact
 Sales grew by 30% and PAT grew 9%. Sales grew 30% to Rs11.1bn, aided
by consolidation of Namaste and Hobi, which contributed 16% of sales in 4Q.
Domestic volume grew by 9.3%, led by 9.7% volume growth in the consumer
care division. Net profit growth lagged on account of the 90bp decline in
EBITDA margin, higher interest costs arising from Rs10bn of new debt to fund
acquisition and a higher effective tax rate.
 EBITDA margin guidance of 18-18.5%. Management has stated that they
are ready to sacrifice some of its margin to face intense competition in a few
categories such as shampoo and to get a bigger slice of the pie. Dabur has
recently increased millage by 40% in shampoo sachets to hold market share.
It is also opting for calibrated price hikes to avoid demand destruction. The
company is confident of getting back to normalized margins from 2H’FY12E
once the lower base effect evaporates and it takes 5% price hikes in FY12E.
 Strong growth guidance for Namaste. The company is optimistic on
doubled sales (~US$200mn) over next 3-4 years due to deeper penetration in
Africa. Namaste has reported 16% EBITDA margin in 4Q and the company is
confident of maintaining its margin at ~15%, 300bp higher prior to acquisition.
 Price advisory to impact MENA sales and margin in near term. Dabur
management has stated that a few governments in MENA have issued price
advisories and prevented companies from price hikes due to political unrest in
the region. This could potentially impact short-term sales growth and
international business margin due to raw material cost pressure.
Earnings and target price revision
 We have revised our FY12E and FY13E earnings by ~6-7% and roll forward
our model. We have also cut our TP to Rs113 from Rs118.
Price catalyst
 12-month price target: Rs113.00 based on a DCF methodology.
 Catalyst: Normalcy in MENA operation and ease of raw material price
Action and recommendation
 Maintain Outperform. We are positive on Dabur’s long-term growth outlook
despite few short term challenges beyond its hand. Recent acquisitions and
strong growth in key domestic categories provide comfort to its long-term
growth and we expect ~20% earnings CAGR over the next three years.