FMCG

Institutional Equity Dabur India

Sameer Deshmukh Valuations turn attractive; Upgrade to Buy

+91 22 67069946 Post our initiating coverage report (dated 5th March 07) on
Buy
sameer.deshmukh@investsmartindia.com
Dabur with a ‘Reduce’ rating, the stock has underperformed the
benchmark Nifty and FMCG index. While the Nifty and FMCG
Rs107
Varun Sehgal
index provided returns of 27% and 37% respectively, Dabur April 1, 2008
+91 22 67069915
provided return of just 10% during the same period (see chart1). Market cap
varun.sehgal@investsmartindia.com
Rs bn 92
Dabur’s revenues and earnings are likely to grow at a CAGR of
US$ mn 2,320
16.3% and 21.3% respectively through FY08-10E. We expect the
Avg 3m daily volume
company to post an EPS of Rs5.0 in FY09E and Rs6.0 in FY10E. 1,133,981
Shareholding (%) We believe that the valuations have now turned attractive at Avg 3m daily value
Promoters 70.8 21.6x and 17.9x based on FY09E and FY10E earnings. USD mn 3
FII’s 13.3 Coupled with that, we expect the FMCG sector to be in favor with Shares outstanding
MFs 1.5 (mn)
the investors considering the slowdown in various other sectors 863
Insurance Co. 6.5
and our positive outlook on domestic consumption space and Reuters/Bloomberg
Others 7.9
stable earnings outlook. We therefore upgrade our rating on the DABU.BO/DABUR.IN
stock to BUY with a DCF based price target of Rs133, an upside of NSE/BSE
Share price performance
24% from current levels. DABUR/500096
52-week high/low (Rs) 134/74 Sensex
Chart 1. Relative performance vis-à-vis benchmark
1m -3m -12m 15,627
170 Nifty
Abs (%) 8.7 -8.3 15.1 Dabur Nifty BSE FMCG
160 4,740
Rel* (%) 13.0 14.5 -13.3
150
*to Nifty
140

Stock chart 130

120
130
110
110 100
90 90
70 80
Mar-07

Apr-07

May-07

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08
A-07

J-07

A-07

O-07

D-07

F-08

Source: IISL research, company

Though we were confident of the company’s operating

performance and its strong management bandwidth, we had
reservations over its valuations that looked stretched at more
than 26x one-year forward earnings.
Dabur has an excellent product portfolio with multiple growth
drivers; this ensures that the company’s growth trajectory is
insulated from downturns in any single category. To put this in
perspective, none of the large brands contribute more than 15%
of company’s aggregate revenues.
Through a 100% subsidiary, Dabur has now entered the retail
sector with ‘New U’ stores. We visited the company’s first store in
New Delhi and were impressed by its layout and the diverse
product range featuring reputed Indian and international brands.
¾ 1
 FMCG

Institutional Equity Dabur India

For 9MFY08, Dabur posted a 16% and a 25.1% growth in revenues and
earnings respectively; this growth was one of the highest in the industry.
Through FY08-10E, revenues are expected to grow at a 16.3% CAGR, supported
by the improved performance of the foods and the international business
divisions and turnaround of consumer health division. We expect the company
to post impressive earnings CAGR of 21.3% in the same period.
The hair care segment is expected to grow at a 14.5% CAGR, driven by
impressive growth in its shampoo portfolio and turnaround of Vatika hair oil.
The flagship brand Dabur Amla is also expected to record steady growth.
Dabur has emerged as a strong player in the oral care segment with a 15%
share. We expect the company to improve its market share further, going
forward, as the management is likely to focus on the premium segment brand,
Meswak.
Dabur has decided to withdraw from the mainstream soap segment and rightly
so, in the wake of failure of Vatika soap and possibility of heightened
competition especially from new entrants like ITC. Dabur is in the process of
introducing medicated soap (Niche segment) under the Dabur brand in FY09.
Dabur’s foods business is expected to be back on high growth trajectory,
going forward, on account of three reasons. Firstly, Dabur has entered the
attractive Rs15bn fruit drink market through Dabur Twist, and is expected to
focus on increasing the presence of the brand. Secondly, the company has
introduced 200ml size SKU under Real and Activ, brands that have largely
driven the growth in the segment in FY08. We expect the brand’s penetration
to improve through these small sizes SKU. Thirdly, with the merger of Dabur
foods with Dabur India, the division’s distribution strength has increased 3-4x;
this is expected to help the brands, going forward.
We expect Dabur’s international business division to grow at a CAGR of 23.5%
through FY08-10E. The company’s renewed focus on GCC region and Egypt
through new product launches is likely to drive this growth.
The consumer health division is expected to be back on the growth path after a
year of consolidation. Dabur has streamlined the distribution structure and
changed the packaging to make products more attractive. The efforts have
started to pay dividends with division posting growth of close to 15% in last
couple of months.
Dabur opened its first retail store under the brand name ‘New U’ in New Delhi.
Spread across 4500sq. feet, the store houses more than 10000 SKU in
personal care, health, and wellness. The product range includes FMCG
products like soaps, shampoos, conditioners, shower gels, skin care products
for men and women from players like HUL, Dabur, Himalaya healthcare, Nivea
among others. Multinational brands like L’Oreal and Revlon have showcased
their entire skin care range. The store also houses products from reputed
international brands like Ferrari and Hugo Boss. Going forward, Dabur is

¾ 2 Dabur/FMCG
 FMCG

Institutional Equity Dabur India

expected to focus on growth of private labels across the personal care and
wellness and beauty segments.
Dabur intends to open 15 ‘New U’ stores in FY09 and around 100-150 stores in
FY10E; the average store size is likely to be 2500 sq. feet. The company
expects to garner revenues in the range of Rs1200-Rs2000 per sq. ft. per
month in first full year of operation. The company has entailed investments of
Rs1.4bn over the next three years. As the stores will be present in high profile
locations, the company has factored in lease rent of Rs150 per square feet per
month. The retail venture is expected to take around three years to break-
even; the company has factored in initial losses of Rs400mn over the period.
Though we have not accounted for the performance of retail business due to
its infancy, success of the chain could prove to be a positive trigger for the
stock, going forward.
We expect the company to post revenues of Rs29.5bn and Rs34.3bn in FY09E
and FY10E respectively. EBITDA margins are expected to improve from 16.2%
in FY08E to 17.2% in FY10E due to improved product mix and higher prices
(Chart2). Dabur has been most conservative in increasing product prices in last
one year. Unlike other FMCG players, Dabur recorded close to 80% of revenue
growth by volumes. We expect the company to increase prices by 6%-8%,
going forward.

Chart 2. Financial projections

40 18%

35 17%
30
17%
25

EBITDA %
16%
Rs bn

20
16%
15
15%
10

5 15%

- 14%
FY06 FY07 FY08E FY09E FY10E

Net sales EBITDA EBITDA %

Source: IISL research, company

Dabur’s net profits are likely to touch Rs4.27bn and Rs5.15bn in FY09E and
FY10E respectively. We expect the company to post an EPS of Rs5.0 and Rs6.0
in the same period. At the current market price, the stock is trading at
attractive PE multiples of 21.6x and 17.9x.
We upgrade our recommendation on the stock from ‘REDUCE’ to ‘BUY’ with a
DCF-based price target of Rs133, an upside of 24% from current levels.

¾ 3 Dabur/FMCG
 FMCG

Institutional Equity Dabur India

Financial
Profit & Loss Balance Sheet
Rs mn FY07 FY08E FY09E FY10E Rs mn FY07 FY08E FY09E FY10E
Net sales 21966.1 25,349.3 29,521.0 34,294.5 ## Share capital 862.9 862.9 862.9 862.9
YoY (%) 17.7 15.4 16.5 16.2 Reserves 3,977.5 6,002.0 8,798.0 12,469.8
Total expenses 18533.6 21239.7 24572.1 28397.5 Net worth 4,840.4 6,864.9 9,660.9 13,332.6
Materials consumed and pu 6367.0 7244.6 8361.7 9626.6
Packing Materials Consume 3343.8 3884.6 4523.9 5255.4 Total borrowings 1,599.0 1,261.0 1,111.0 961.0
Staff cost 1666.7 1916.7 2204.2 2534.8 Deferred tax 244.5 228.6 207.5 182.1
Advt. and sales promotion 2741.3 3163.6 3684.2 4279.9 Total liabilities 6,683.9 8,354.5 10,979.4 14,475.7
Other expenses 4414.8 5030.3 5798.1 6700.8
EBIDTA 3432.5 4109.6 4948.9 5897.0
YoY (%) 19.8 19.7 20.4 19.2 Gross block 6,098.9 6,698.9 7,398.9 8,098.9
EBIDTA (%) 15.6% 16.2% 16.8% 17.2% Less: Acc. depreciation (2,380.7) (2,743.3) (3,143.8) (3,582.3)
Other income 259.1 331.7 379.7 436.0 Net block 3,718.2 3,955.6 4,255.0 4,516.6
PBIDT 3691.6 4441.3 5328.6 6333.0 CWIP 73.4 73.4 73.4 73.4
Interest 153.8 145.8 128.3 110.8
Gross profit 3537.8 4295.6 5200.4 6222.3 Investments 807.0 1,807.0 2,807.0 3,807.0
Depreciation 342.9 362.6 400.5 438.4 Current assets 6,404.6 7,424.3 9,589.6 12,785.5
PBT 3194.9 3932.9 4799.9 5783.9 Inventories 2,571.1 3,093.3 3,602.4 4,184.9
(-) Tax 373.2 432.6 528.0 636.2 Debtors 1,419.7 1,546.7 1,801.2 2,092.4
Tax/ PBT 11.7% 11.0% 11.0% 11.0% Cash 606.7 657.7 1,709.4 3,631.1
PAT 2821.7 3,500.3 4,271.9 5,147.6 ## Loans and advances 1,807.2 2,126.6 2,476.6 2,877.1
Extra ordinary income 0.0 0.0 0.0 0.0 Current liabilities 3,624.1 4,072.9 4,743.1 5,510.1
Minority interest -8.7 0.0 0.0 0.0 Provisions 893.4 1,031.1 1,200.7 1,394.9
PAT after EO income 2830.4 3500.3 4271.9 5147.6 Net current assets 1,887.1 2,320.4 3,645.8 5,880.5
YoY (%) 32.2 23.7 22.0 20.5 Miscellaneous expenses 198.2 198.2 198.2 198.2
Net profit margin % 12.8% 13.8% 14.5% 15.0% Total assets 6,683.9 8,354.5 10,979.4 14,475.7

Key Ratios Cash Flow

FY07 FY08E FY09E FY10E Rs mn FY07 FY08E FY09E FY10E
EPS (Rs) 3.3 4.1 5.0 6.0 Net profit 2,830.4 3,500.3 4,271.9 5,147.6
CEPS (Rs) 3.7 4.5 5.4 6.4 Depn and w/o 342.9 362.6 400.5 438.4
Book value (Rs) 5.6 8.0 11.2 15.5 Deferred tax 86.2 (15.9) (21.1) (25.4)
Dividend per share (Rs) 1.4 1.5 1.5 1.5 Change in working cap (1,439.9) (382.3) (273.6) (313.1)
Debt-equity (x) 0.3 0.2 0.1 0.1
Operating cash flow 1,819.6 3,464.8 4,377.6 5,247.5
ROCE 47.0 49.5 46.2 41.7
ROE 57.4 59.8 51.7 44.8 Capital expenditure (499.4) (600.0) (700.0) (700.0)
Investments (385.7) (1,000.0) (1,000.0) (1,000.0)
Valuations Investing cash flow (885.1) (1,600.0) (1,700.0) (1,700.0)

PE (x) 32.6 26.4 21.6 17.9 Dividend (1,392.5) (1,475.9) (1,475.9) (1,475.9)
Cash PE (x) 29.2 24.0 19.9 16.6 Fresh equity 0.0 0.0 0.0 0.0
PEG Ratio 1.0 1.1 1.0 0.9 Debt/Preference shares 555.7 (338.0) (150.0) (150.0)
Price/book value (x) 19.1 13.4 9.6 6.9 Financing cash flow (836.8) (1,813.8) (1,625.9) (1,625.9)
Dividend yield 1.3 1.4 1.4 1.4 Others (2.7) 0.0 0.0 0.0
Market cap/sales 4.1 3.6 3.1 2.6 Net change in cash 95.0 51.0 1,051.8 1,921.6
EV/sales (x) 4.1 3.5 3.0 2.5 Opening cash 511.7 606.7 657.7 1,709.4
EV/EBIDTA (x) 26.4 21.8 17.6 14.3 Closing cash 606.7 657.7 1,709.4 3,631.1

¾ 4 Dabur/FMCG
 FMCG

Institutional Equity Dabur India

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Certification of Research Analyst

We, Sameer Deshmukh and Varun Sehgal ,hereby certify that: the views expressed in the attached research report accurately reflect our
personal views about Dabur India and its securities, and my compensation is not directly or indirectly, related to the specific views or
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¾ 5 Dabur/FMCG
 FMCG

Institutional Equity Dabur India

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¾ 6 Dabur/FMCG