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�� Sales bang on target; acquisitions boost topline
Dabur’s Q4FY11 revenue jumped 30.6% Y-o-Y to INR 11.1 bn (our estimate
~INR 11.1 bn). Core profit growth of 10.4% Y-o-Y to INR 1.4 bn (below our
estimate of INR 1.5 bn) was impacted by increase in tax rate, which surged
574bps Y-o-Y to 22.0%. Q4FY11 numbers are, however, not comparable to
previous quarters due to acquisition and consolidation of Hobi and Namaste.
�� Standalone business robust; decline in A&P needs to be monitored
While the company’s standalone sales increased 13.4% Y-o-Y, PAT jumped 19%
Y-o-Y. Also, EBITDA soared 25% Y-o-Y as EBITDA margins increased 207bps
Y-o-Y although gross margins dipped 155bps Y-o-Y primarily due to steep
359bps Y-o-Y reduction in ad spending. Though Dabur’s ability to offset raw
material pressure looks commendable, such a sharp reduction in A&P spending
can be detrimental to long-term growth prospects. Also, the disappointment in
shampoo continued with 32% Y-o-Y decline in Q4FY11.
�� Margins dip due to surge in other expenditure
Dabur’s EBITDA (consolidated) grew 24.1% Y-o-Y to ~INR 2.1 bn as EBITDA
margin contracted 90bps Y-o-Y to 19.1%. This was primarily led by surge in
other expenditure (Namaste related; 448bps Y-o-Y, due to likely reclassification
between material cost and other expenditure of Namaste led to 445bps increase
in other expenditure and 116bps decline in material cost in consolidated
financials). 94bps jump in COGS was offset by lower advertising and sales
promotion (A&P) spending (~205bps) and lower staff costs (~59bps).
�� Outlook and valuations: Strong volume growth; maintain ‘BUY’
Volumes were robust in domestic and international businesses in Q4FY11. The
negative is the higher tax rate and reduced ad spending in a high competitive
scenario. However, Egypt has made a comeback, but other countries in MENA
region are still a cause of concern. As per management, raw material inflation
will continue to hurt for the next two quarters. However, further margin
slippages are unlikely as the company has effected price hikes and plans to take
further hikes if necessary. With stable/increasing market share in majority of the
categories and long-term benefits to accrue from international acquisition of Hobi
and Namaste, we re-iterate our ‘BUY’ recommendation and rate it ‘Sector
Outperformer’ on relative return basis.
�� Q4FY11 conference call takeaways
• Foods: The category posted 30-35% gross margins. No immediate pressure on juice
despite strong competitive intensity from Coke, Pepsi and HUL. Plan to phase out low
margin commodity export business by FY13. In congruence with this strategy of
maintaining margin at current level for foods, the company does not plan to get into
low-priced fruit juices and intends to stick to its value-added premium juice strategy.
Margins in this business are already low; hence, the company does not expect a
repeat of shampoo’s disruptive competition shown by MNCs.
• Fem: Fem contributed INR 320 mn to the topline. Dabur launched Fem sanitizer
(market size INR 200 mn, but can be high growth category) in the current quarter,
flagging a change in strategy from care to protection.
• Toothpaste: Dabur expanded market share by 90bps Y-o-Y in MAT March 2011 and
is confident of growing ahead of the market. Margins in this business are already low;
hence, the company does not expect a repeat of shampoo’s disruptive competition
shown by MNCs.
• Chyawanprash: Flavored Chyawanprash has done well and the company also
launched sugar-free Chyawanprash. Market share in Chyawanprash expanded by
200bps Y-o-Y. The company will not invest in advertising Chyawanprash Junior as
margins have come off and it is important to focus on existing and core format.
• Hair oil: Rural demand boosted growth in this category with hair oil growing at 15%.
Dabur Amla grew 21.7% Y-o-Y while Vatika grew 25.9%. In coconut oil category
(Vatika), high copra inflation was offset by price increase.
• OTC products: Nutrigo health supplements have met initial bench marks and Dabur
is testing waters in OTC. Its key competitors are Supractive and Revital. If Nutrigo
does well, the company may look at expanding its product portfolio in niche spaces.
Honitus Day & Night tablets for cold & flu have done well. The company plans to
focus more on this category for future growth as margins are higher and competition
less intense.
• Shampoo: Disruptive competitive activity with high intensity of consumer
promotions/ad spending by MNCs led to contraction of shampoos (~32% decline).
Dabur increased grammage by 40% which impacted margins (margins in shampoo
business were historically high and have now normalised); however, this will
positively impact volumes from the next quarter. The company expects reasonable
growth in FY12. P&G has further stepped up the aggression in shampoos with a 15%
price reduction and we believe that Dabur will continue to face pressure in this
category.
• International business: Nepal business suffered due to political scenario, leading to
supply issues, in Q4FY11. Operations in Nepal are moving towards normalcy. Nepal
contributes INR 800 mn to the topline. A sustainable margin in international business
is ~20%.
• MENA: Egypt (contributes INR 1,200 mn to topline) is back on track and the current
normal environment is positive for the company. However, current crisis scenario in
North African countries (contributing INR 500-1000 mn) is a cause of concern. Also,
most of the African nations, due to the current scenario, have price control for most
products which restricts most companies from effecting price hikes. If price control
continues, we believe it will adversely impact International business division’s (IBD)
profitability. The company intends to take substantial price hike by end of the current
quarter.
• Hobi: Hobi has a ~45% gross margin with growth of 10-12% in constant currency
terms. Dabur plans to introduce Hobi products in other IBD markets. The company
Edelweiss Securities Limited 3
Dabur
will gradually launch Hobi products in India and will not advertise in the first year of
launch. Hobi’s exposure to North Africa is more than Dabur’s, thereby adding
uncertainty to the business.
• Namaste: Namaste has ~48% gross margin and EBITDA margin of 16%. However,
management feels such high margin is unsustainable. Namaste’s US business grew
faster than its Africa business in the current quarter. The company intends to setup
infrastructure for Namaste’s products in Africa in FY12 and subsequently intends to
double the sales every year from FY13. Also, likely reclassification between material
cost and other expenditure of Namaste led to 445bps increase in other expenditure
and 116bps decline in material cost in consolidated financials.
• Retail business: Dabur has 38 stores now and plans to expand to 75 stores by
FY12E end while keeping losses at FY11 level (INR 100-120 mn). The company is
focused on building scale of this business and unlock value once retail FDI is open.
• Price hikes: Dabur has already taken 5-7% price hike in Q1FY12 and expects gross
margins to remain stable Q-o-Q in Q1FY12. The company does not anticipate any
impact on growth following these price hikes.
• Margin: International margins, currently, are similar to the domestic business.
However, management expects international margins to surpass domestic margins in
a couple of years.
• Ad spends: Dabur expects them to be in the 13-15% range in the coming quarters
for domestic business. The company will slow down pace of new product launches in
home & personal care till there is gross margin pressure.
• Tax rates: The company will assume effective tax rate of 20% in FY12.
• M&A strategy: Dabur has the bandwidth for bolt-on acquisitions and believes it is a
good way to grow and hedge against certain disruptive competition. The company
may look at health care opportunities. Valuations in India do not justify the value
they bring to the table. The company’s primary focus is on acquiring EPS accretive
businesses.
�� Company Description
Dabur has three divisions in India apart from its international operations. Consumer care
division (CCD) offers a wide range of products in hair care, oral care, health
supplements, digestives and candies, and baby and skin care products, based on
ayurveda. The consumer health division (CHD) includes over-the-counter (OTC)
products, Asavs, and branded ethical, and classic products. The third division, Dabur
Foods Ltd produces fruit juices, cooking pastes, sauces, and items for institutional food
purchases. Dabur is unique among its FMCG peers because of its positioning as an Indian
company whose products are derived from exotic sources such as ancient ayurvedic
texts and natural ingredients such as herbs.
The company has various brand leaders in different market segments - Dabur
Chyawanprash, a health tonic, and Hajmola - a digestive tablet. Real, launched during
1996-97, has also successfully carved its niche in the market.
�� Investment Theme
Dabur’s broad product portfolio provides the best play on Indian FMCG spend by virtue of
its strong presence in less penetrated and high growth categories. Dabur’s positioning on
the ‘health and wellness’ platform, backed by its ANH (ayurvedic/natural/herbal) image
is very progressive. This, combined with its demonstrated ability to create new
categories and sub-categories, makes it best-placed to capture lifestyle changes-led
growth in the FMCG space. Dabur has also demonstrated its ability to make and
integrate smart acquisitions (Balsara) that complement its product portfolio and thereby
drive inorganic growth. Improvement in margins of foods and international businesses
are expected to result in improvement in margins for the consolidated operations.
�� Key Risks
A slowdown in rural demand due to lower government spending or a monsoon failure
could impact Dabur’s revenues significantly. The company’s products such as Dabur
Chyawanprash and Dabur Lal Tail are prominently sold in the rural areas, and hence,
depend on growth in rural demand.
Further, Ayush, the Ayurvedic Association of India, has recently declared strict
adherence to ayurvedic norms; the body asked many companies to change the
formulation of Chyawanprash. Any such changes in future could dampen the sales,
especially during the change of formulation, when the product is taken off the shelf.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Sales bang on target; acquisitions boost topline
Dabur’s Q4FY11 revenue jumped 30.6% Y-o-Y to INR 11.1 bn (our estimate
~INR 11.1 bn). Core profit growth of 10.4% Y-o-Y to INR 1.4 bn (below our
estimate of INR 1.5 bn) was impacted by increase in tax rate, which surged
574bps Y-o-Y to 22.0%. Q4FY11 numbers are, however, not comparable to
previous quarters due to acquisition and consolidation of Hobi and Namaste.
�� Standalone business robust; decline in A&P needs to be monitored
While the company’s standalone sales increased 13.4% Y-o-Y, PAT jumped 19%
Y-o-Y. Also, EBITDA soared 25% Y-o-Y as EBITDA margins increased 207bps
Y-o-Y although gross margins dipped 155bps Y-o-Y primarily due to steep
359bps Y-o-Y reduction in ad spending. Though Dabur’s ability to offset raw
material pressure looks commendable, such a sharp reduction in A&P spending
can be detrimental to long-term growth prospects. Also, the disappointment in
shampoo continued with 32% Y-o-Y decline in Q4FY11.
�� Margins dip due to surge in other expenditure
Dabur’s EBITDA (consolidated) grew 24.1% Y-o-Y to ~INR 2.1 bn as EBITDA
margin contracted 90bps Y-o-Y to 19.1%. This was primarily led by surge in
other expenditure (Namaste related; 448bps Y-o-Y, due to likely reclassification
between material cost and other expenditure of Namaste led to 445bps increase
in other expenditure and 116bps decline in material cost in consolidated
financials). 94bps jump in COGS was offset by lower advertising and sales
promotion (A&P) spending (~205bps) and lower staff costs (~59bps).
�� Outlook and valuations: Strong volume growth; maintain ‘BUY’
Volumes were robust in domestic and international businesses in Q4FY11. The
negative is the higher tax rate and reduced ad spending in a high competitive
scenario. However, Egypt has made a comeback, but other countries in MENA
region are still a cause of concern. As per management, raw material inflation
will continue to hurt for the next two quarters. However, further margin
slippages are unlikely as the company has effected price hikes and plans to take
further hikes if necessary. With stable/increasing market share in majority of the
categories and long-term benefits to accrue from international acquisition of Hobi
and Namaste, we re-iterate our ‘BUY’ recommendation and rate it ‘Sector
Outperformer’ on relative return basis.
�� Q4FY11 conference call takeaways
• Foods: The category posted 30-35% gross margins. No immediate pressure on juice
despite strong competitive intensity from Coke, Pepsi and HUL. Plan to phase out low
margin commodity export business by FY13. In congruence with this strategy of
maintaining margin at current level for foods, the company does not plan to get into
low-priced fruit juices and intends to stick to its value-added premium juice strategy.
Margins in this business are already low; hence, the company does not expect a
repeat of shampoo’s disruptive competition shown by MNCs.
• Fem: Fem contributed INR 320 mn to the topline. Dabur launched Fem sanitizer
(market size INR 200 mn, but can be high growth category) in the current quarter,
flagging a change in strategy from care to protection.
• Toothpaste: Dabur expanded market share by 90bps Y-o-Y in MAT March 2011 and
is confident of growing ahead of the market. Margins in this business are already low;
hence, the company does not expect a repeat of shampoo’s disruptive competition
shown by MNCs.
• Chyawanprash: Flavored Chyawanprash has done well and the company also
launched sugar-free Chyawanprash. Market share in Chyawanprash expanded by
200bps Y-o-Y. The company will not invest in advertising Chyawanprash Junior as
margins have come off and it is important to focus on existing and core format.
• Hair oil: Rural demand boosted growth in this category with hair oil growing at 15%.
Dabur Amla grew 21.7% Y-o-Y while Vatika grew 25.9%. In coconut oil category
(Vatika), high copra inflation was offset by price increase.
• OTC products: Nutrigo health supplements have met initial bench marks and Dabur
is testing waters in OTC. Its key competitors are Supractive and Revital. If Nutrigo
does well, the company may look at expanding its product portfolio in niche spaces.
Honitus Day & Night tablets for cold & flu have done well. The company plans to
focus more on this category for future growth as margins are higher and competition
less intense.
• Shampoo: Disruptive competitive activity with high intensity of consumer
promotions/ad spending by MNCs led to contraction of shampoos (~32% decline).
Dabur increased grammage by 40% which impacted margins (margins in shampoo
business were historically high and have now normalised); however, this will
positively impact volumes from the next quarter. The company expects reasonable
growth in FY12. P&G has further stepped up the aggression in shampoos with a 15%
price reduction and we believe that Dabur will continue to face pressure in this
category.
• International business: Nepal business suffered due to political scenario, leading to
supply issues, in Q4FY11. Operations in Nepal are moving towards normalcy. Nepal
contributes INR 800 mn to the topline. A sustainable margin in international business
is ~20%.
• MENA: Egypt (contributes INR 1,200 mn to topline) is back on track and the current
normal environment is positive for the company. However, current crisis scenario in
North African countries (contributing INR 500-1000 mn) is a cause of concern. Also,
most of the African nations, due to the current scenario, have price control for most
products which restricts most companies from effecting price hikes. If price control
continues, we believe it will adversely impact International business division’s (IBD)
profitability. The company intends to take substantial price hike by end of the current
quarter.
• Hobi: Hobi has a ~45% gross margin with growth of 10-12% in constant currency
terms. Dabur plans to introduce Hobi products in other IBD markets. The company
Edelweiss Securities Limited 3
Dabur
will gradually launch Hobi products in India and will not advertise in the first year of
launch. Hobi’s exposure to North Africa is more than Dabur’s, thereby adding
uncertainty to the business.
• Namaste: Namaste has ~48% gross margin and EBITDA margin of 16%. However,
management feels such high margin is unsustainable. Namaste’s US business grew
faster than its Africa business in the current quarter. The company intends to setup
infrastructure for Namaste’s products in Africa in FY12 and subsequently intends to
double the sales every year from FY13. Also, likely reclassification between material
cost and other expenditure of Namaste led to 445bps increase in other expenditure
and 116bps decline in material cost in consolidated financials.
• Retail business: Dabur has 38 stores now and plans to expand to 75 stores by
FY12E end while keeping losses at FY11 level (INR 100-120 mn). The company is
focused on building scale of this business and unlock value once retail FDI is open.
• Price hikes: Dabur has already taken 5-7% price hike in Q1FY12 and expects gross
margins to remain stable Q-o-Q in Q1FY12. The company does not anticipate any
impact on growth following these price hikes.
• Margin: International margins, currently, are similar to the domestic business.
However, management expects international margins to surpass domestic margins in
a couple of years.
• Ad spends: Dabur expects them to be in the 13-15% range in the coming quarters
for domestic business. The company will slow down pace of new product launches in
home & personal care till there is gross margin pressure.
• Tax rates: The company will assume effective tax rate of 20% in FY12.
• M&A strategy: Dabur has the bandwidth for bolt-on acquisitions and believes it is a
good way to grow and hedge against certain disruptive competition. The company
may look at health care opportunities. Valuations in India do not justify the value
they bring to the table. The company’s primary focus is on acquiring EPS accretive
businesses.
�� Company Description
Dabur has three divisions in India apart from its international operations. Consumer care
division (CCD) offers a wide range of products in hair care, oral care, health
supplements, digestives and candies, and baby and skin care products, based on
ayurveda. The consumer health division (CHD) includes over-the-counter (OTC)
products, Asavs, and branded ethical, and classic products. The third division, Dabur
Foods Ltd produces fruit juices, cooking pastes, sauces, and items for institutional food
purchases. Dabur is unique among its FMCG peers because of its positioning as an Indian
company whose products are derived from exotic sources such as ancient ayurvedic
texts and natural ingredients such as herbs.
The company has various brand leaders in different market segments - Dabur
Chyawanprash, a health tonic, and Hajmola - a digestive tablet. Real, launched during
1996-97, has also successfully carved its niche in the market.
�� Investment Theme
Dabur’s broad product portfolio provides the best play on Indian FMCG spend by virtue of
its strong presence in less penetrated and high growth categories. Dabur’s positioning on
the ‘health and wellness’ platform, backed by its ANH (ayurvedic/natural/herbal) image
is very progressive. This, combined with its demonstrated ability to create new
categories and sub-categories, makes it best-placed to capture lifestyle changes-led
growth in the FMCG space. Dabur has also demonstrated its ability to make and
integrate smart acquisitions (Balsara) that complement its product portfolio and thereby
drive inorganic growth. Improvement in margins of foods and international businesses
are expected to result in improvement in margins for the consolidated operations.
�� Key Risks
A slowdown in rural demand due to lower government spending or a monsoon failure
could impact Dabur’s revenues significantly. The company’s products such as Dabur
Chyawanprash and Dabur Lal Tail are prominently sold in the rural areas, and hence,
depend on growth in rural demand.
Further, Ayush, the Ayurvedic Association of India, has recently declared strict
adherence to ayurvedic norms; the body asked many companies to change the
formulation of Chyawanprash. Any such changes in future could dampen the sales,
especially during the change of formulation, when the product is taken off the shelf.
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