Dabur: A super performance

The Dabur stock has risen 23 per cent since April, marginally outperforming the FMCG index, hitting Rs 141 in early August. At those levels, the stock was trading at nearly 25 times estimated 2009-10 earnings; at the current level of Rs 120, it trades at a far more reasonable 21 times. Dabur has built a portfolio of strong brands and acquisition of skincare brand FemCare has strengthened it further.

The stock is a good play on growing rural incomes — about half the company’s revenues are from the rural market. Besides, the company is foraying into new markets overseas — the international business division, which brings a fifth of the revenues, has been faring well. While volumes were up sharply in the June 2009 quarter by 16 per cent year-on-year, probably the biggest growth in two years, a more sustainable growth would be around 10-12 per cent.

That would imply a sustainable top line growth in the next couple of years of around 17-18 per cent — net sales in the June quarter were up 23 per cent. The strong top line growth in the June quarter and lower prices of raw materials allowed the operating profit margins to expand by about 100 basis points to 16.4 per cent despite higher spends on advertising and promotions.

Going ahead, margins should remain at these levels and once the debt comes off — currently at Rs 35 crore — expenses on interest should ease. Of course, the company’s retail venture could take a while to stabilise — losses were up sequentially in the June quarter to just under Rs 3 crore.