Healthy growth

POUND WISE

Dabur India’s vast health-based product range and focus on overseas markets will help sustain growth rates.

Dabur India is an investment opportunity in these uncertain times with a consistent historical performance to boast off and, notably an ability to deliver steady returns in the coming years. Its consolidated sales and net profits have grown at 18 per cent and 33 per cent, respectively in the last five years.

Dabur’s transformation from an ayurvedic products company to a growing modern FMCG player with diverse product range will hold it in good stead. Presence in health- and personal-care segments, focus on home-care along with scaling up of food products range, in cognizance of recent developments in the health supplement and skin-care side, would facilitate stable earnings growth in the future.

Consumer care

The consumer care division (CCD) accounts for the lion’s share of the company’s revenues, at over 70 per cent. Regular brand extensions, renovations and re-launches have helped sustain growth rates in CCD business. CCD has a diversified product reach with interests in health supplements (Chyawanprash, Dabur honey), oral-care (Babool, Meswak and Dabur Red), digestives (Hajmola), hair care (Vatika, Anmol) and home-care (Odomos).

Although, CCD accounts for a large chunk of revenues, its sales growth rate at around 13 per cent in the recent quarter Q2FY09 is lower as compared to the average of 16.4 per cent delivered in the last five years. This is however, a blip in the near-term as the company has chalked plans to revitalise this division with renewed focus on home care, health supplements, foods and skin-care segments, which will provide the next leg of growth.

The company has undertaken expansion plans in its Gulabari rose water-based skin-care range through several launches like face fresheners, face sprays, cold creams and moisturising lotion. A launch of a new ayurvedic skin-care range is also on the anvil.

In health supplements, apart from the dominance of Chyawanprash (more than 60 per cent market share), ChyawanJunior pan-India launch in the milk beverage segment later, hopes to drive the growth for this segment. Recent addition of Mahinder Singh Dhoni to endorse Chyawanprash will provide greater visibility for the future.

The company entered into the home-care category after the acquisition of Balsara and currently occupies a dominant position in both mosquito repellent creams (Odomos) and air freshener (Odonil; in solid and liquid form) space. The recent launch of Dazzl in the surface cleaning category along with two new variants of Odomos should help re-energise sales in this segment.

In the juices business, Dabur’s brands (Real and Real Activ) occupy an estimated 50 per cent of the market. However, they grew by just 9 per cent (a drop of 600 basis points q-o-q) in Q2 FY09 due to the one month closure of its Nepal-based factory.

Plans to introduce new variety of fruit-based juices and also provide small-sized packs (at different price points) are expected to help boost volumes in the ‘natural’ juice business, which is based on the health platform. Its Hommade brand has enabled culinary (processed foods) range segment to grow at 25 per cent in this quarter.

To sum up, nearly all the segments that Dabur operates in, are huge in size, which suggest that there will be no dearth of growth opportunities for the company. Any acquisition-related moves will propel growth rates further.

Ayurvedic push

Consumer Health Division (contributes 7 per cent to total sales) deals with classical ayurvedic medicines (range of over 260 medicines) and has been able to deliver growth rates of above 20 per cent in the last three quarters. While new product launches like Dabur Active Blood Purifier, Bhringraj Ayurvedic Tail and Dabur Super Thanda Tail have been launched in the last two quarters, there have been several re-launches; 60 per cent of OTC portfolio re-launched during FY08.

IN THE PINK OF HEALTH
Rs in crore	FY08	FY09E	FY10E
Net sales	2,396.0	2,794.0	3,278.0
EBITDA	443.0	472.0	555.0
Net profit	333.0	387.0	456.0
EPS (Rs)	3.9	4.5	5.3
P/E (x)	21.8	18.9	16.0
E: Analyst estimates

The company has been able to build a sound distribution network, which along with aggressive brand campaigns, have enabled this segment to grow at a rapid pace. The division is planning to develop ayurvedic products for serious medical disorders like life style ailments besides, adding new variants of the successful Hajmola and Honitus, all of which will sustain growth rates in future.

Retail pains?

The company’s foray into retail segment (retail store offerings for health and beauty conscious), which is through a subsidiary, hasn’t been fruitful with expected losses to the tune of around Rs 20 crore for FY09. This business has been a drag on the consolidated numbers (standalone PAT growth 20.9 per cent whereas consolidated growth is 18.2 per cent in FY08).

The bright note is the correction in real estate prices. Understandably, the company has been going slowly in opening outlets to take advantage of cheaper real estate prices going forward. Lower prices typically help in faster break-even of new stores.

Overseas gains

The International division share in the overall revenue pie has increased from around 10 per cent of its sales to 16 per cent in the last five 5 years on the back of an average 30 per cent annual growth. The H1FY09, too, was good with 40 per cent growth led by impressive performance in Gulf and other countries, thus propelling its share to 19 per cent of overall sales.

The company is spending aggressively on advertising to cater to the local diasporas in the respective countries, so as to maintain these growth rates. Additionally, Dabur is also set to start production of personal care products from its new plant in UAE by December 2008, to meet the increasing demand for its products.

Investment rationale

Dabur’s focus on sustaining earnings growth through organic growth and strategic acquisitions has been its forte. For instance, targeting markets with lower penetration levels like health supplements, packaged fruit juice and skin care creams will drive growth in the future.

Likewise, the company’s strategic procurement (sourced its raw materials forward in January, thus enabling to tug over the higher input costs over the year) and lower raw materials at this stage, provide cushion on the margin front. The savings on account of lower raw materials and tax rate (around 13 per cent) will help increase its advertising and promotion expenditure in the scenario of new launches.

To sum up, Dabur has the ingredients to record earnings growth of 16-17 per cent over the next two years. And, the stock which trades at around 16x its estimated FY10 earnings, can deliver 18-20 per cent annualised returns for the next two years.