JM Financial: Dabur: Personal care performance remained weak

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Dabur: Personal care performance remained weak


 Signs of fatigue in sales momentum: Dabur’s 2QFY11 sales, EBITDA and net
profit grew 15%, 17% and 15% to `9.7bn, `2.1bn and `1.6bn respectively vs
our expectation of 17-19% growth. Domestic volume growth decelerated from
c.15% in 1Q to c.10% - slowest in past 6 quarters. Hair care segment
disappointed with sales growing just 2% following a mere c.7% growth over
the past 9 months. Shampoo volume declined for second quarter running
(c.14% in 2Q) while hair oils volume grew 5%. Strong performance of health
supplements (+31% aided by a 40%+ growth in Chyawanprash) helped
resurrect the consolidated growth profile. In terms of other categories, home
care grew well +42% (1Q: 32%), international business reported topline
growth of 19% (20% volume growth offset by adverse translation impact),
domestic foods grew 22%. Fem was especially disappointing with a mere 12%
sales growth in the second year of acquisition (1Q: 8%).
 Consolidated gross margins compressed 210bps; leverage from
international margin disappearing: Compared to last 6 months which
witnessed divergent trend between margin behaviour in domestic and
international businesses, current quarter witnessed a 210-240bps gross
margin compression in both standalone and consolidated financials. EBITDA
margin, on the contrary, expanded 50bps due to slower growth in A&P (mere
1% rise in consolidated financials, 10% increase in domestic) and ‘other
expenditure’. CHD reported 600bps dip in EBIT margin, resulting in a 11%
profit decline despite a 15% topline growth in the segment. Current quarter’s
CHD margin was impacted by higher A&P in the segment and is one of the
lowest levels ever.
 Maintain HOLD; weak personal care growth remains an area of concern:
We keep our FY11-13 earning estimates largely unchanged; our EPS forecasts
stand at `3.4, `4.0 and `4.6 respectively (17% EPS CAGR). We roll forward to
Dec’11 and arrive at a TP of `103 based on 23x target PE multiple, which is
in-line with the past 5 years’ average and translates into a PEG of 1.35.
 Conference call scheduled for Oct 28, 4PM IST: Dabur’s management will
be hosting a conference call on Thursday October 28 at 4PM IST. The Mumbai
dial-in numbers are: +91 22 3065 0117/6629 0317. The international dial-in
numbers are: Singapore: 800 101 2045, HK: 800 964 448, USA: 1 866 746
2133, UK: 0 808 101 1573.