Dabur: Dapper results

Dabur has done well in its existing and new initiatives

Dabur has continued its good performance this fiscal, reporting a 26 per cent rise in consolidated revenues and a 41.2 per cent jump in net profit before accounting for minority interest.

Of course, stripped of Balsara's numbers (which the company acquired this year), revenue growth would fall to 12.9 per cent, while net profit growth would be about 27 per cent. But even that is impressive for an FMCG company.

Revenues of the standalone company, Dabur India, rose 9.9 per cent last quarter, nearly double the rate at which they had grown in the June quarter. But growth was expected to pick up, since sales in April and May this year were hit because of the implementation of VAT.

Operating margin of the standalone business jumped nearly 300 basis points, just as in the June quarter, thanks mainly to savings from the company's new facilities in tax havens.

It makes more sense, however, to look at Dabur's consolidated results, since the share of the share of the standalone business has fallen from 82 per cent last year to about 71 per cent this fiscal.

Consolidated numbers got a boost from Dabur's foods business, revenues of which grew 34.4 per cent last quarter. More importantly, the foods division turned in a profit of Rs 3.7 crore at a margin of 7.5 per cent against a loss of Rs 0.8 crore same time last year.

But the highlight of consolidated numbers is the sharp turnaround in Balsara's financials. Balsara turned in a net profit of Rs 6.2 crore last quarter, or 12.7 per cent of its revenues, which is significant for two reasons.

First, it was a loss-making company when Dabur acquired it earlier this year. Second, its net margin is almost now in line with Dabur's other business - on a consolidated basis, Dabur has a net margin of 13.4 per cent. The quick turnaround is mainly because of savings on selling, marketing and distribution costs, thanks to Dabur's well-established network.

Dabur's results in the first six months of this fiscal have pleasantly surprised analysts, who would now have to raise EPS estimates for the year from current levels of Rs 6.5 a share.

At the same time, however, one needs to note that one cannot expect similar growth rates next fiscal, since much of the improvement in margin is expected to be captured this fiscal.

Much would depend on revenue growth, therefore, and since Dabur already trades at about 24 times FY06 earnings, it is imperative that revenue growth next year is higher than current levels of about 13 per cent (adjusted for Balsara).

Ranbaxy

Ranbaxy's September quarter results indicate that pricing pressure in key American generics market has increased. To make things worse, operating costs have been rise, as have legal and research costs. As a result, Ranbaxy's consolidated EBITDA margins fell a staggering 2064 basis points y-o-y to just 2.31 per cent last quarter.

Even on a sequential basis, the fall in EBITDA margins was as high as 1031 basis points, which means things have become much worse even since the June quarter.

In fact, at pre-tax level, Ranbaxy reported a loss of Rs 15.4 crore last quarter. Based on consensus estimates, analysts were expecting an EPS of Rs 14 for the year ended December 2005.

In the nine months till September, Ranbaxy has managed just about Rs 5 a share, indicating that analysts were way off base. Not surprisingly, the stock has fallen nearly 12 per cent since results were announced on Friday.

Coming back to the results, sales in the key American market, which accounts for about 26 per cent of total revenues, fell 25 per cent y-o-y. According to the company, total prescriptions in the US market grew 25 per cent, but pricing pressure led to a dip in income from this market.

On a sequential basis, too, revenues from the American market fell by about 7.5 per cent. Like earlier quarters, the company has attempted to offset this by expanding its presence in emerging markets overseas and in the domestic market.

Sales in the domestic market grew 21 per cent y-o-y, thanks to an upturn in domestic sales after almost 12-15 months of near stagnant sales. Even sales in Russia and other CIS countries grew 21 per cent. As a result, the company's net sales fell only about three per cent to Rs 1283 crore.

Meanwhile, R&D expenses soared 71 per cent to Rs 153.2 last quarter and as a percentage of net sales, it jumped 520 basis points to 11.95 per cent.

Even sequentially, this cost jumped 36.8 per cent. Analysts point out that these costs could continue to remain high, given the need to aggressively roll out new products overseas.

Of course, even legal costs are estimated to have hurt overall profitability, given the high profile litigations the company has been involved in. While most of these factors were expected to hit profit, the fact that Ranbaxy reported a loss at the PBT has taken markets by surprise.

Going forward, the company is optimistic that the several generic product launches it has planned in America in the December quarter could help revitalise sales.

However, with pricing pressures showing no signs of easing, analysts rule out a substantial improvement in the company's profit in the medium term.

The results have proved to be a double whammy for the Ranbaxy stock, which was already languishing because of an adverse ruling in the Lipitor case.

But even after a significant 23 per cent price correction, the stock trades at over 30 times revised estimates for CY06, which means there could be further correction.