Stock Pick - Dabur India Ltd.

Dabur India, with popular brands such as Vatika, Real, Hajmola and Dabur Chyawanprash, is a prominent player in the fast moving consumer goods (FMCG) space. The company has a well-diversified portfolio of over 350 products spread over segments such as consumer products, health products and foods. With very little presence in the luxury or premium segments (which are the first to bear the brunt of any slowdown in consumer spending), Dabur is fairly insulated from slowdown pressures. Further to this, new launches and brand extensions, growth in key categories such as hair oils, shampoos and baby and skin care and strong growth in the international market make Dabur a good, long-term investment.

Business performance. During the September 2008 quarter, Dabur’s consumer care division (CCD), which forms almost 77 per cent of the revenues, grew by 18.86 per cent. Its renewed focus on ayurvedic over-the-counter (OTC) products saw consumer healthcare division grow by over 21 per cent in the same quarter.

Within CCD, hair oils grew by 20 per cent in the quarter while baby and skin care business saw 18 per cent growth. Shampoos grew by over 36 per cent in the quarter. A recent report by AC Nielsen ORG Marg says Vatika shampoo’s sales (volumes) grew by 38 per cent during the April-September 2008 period compared to the industry average of 10 per cent. In terms of value, it grew by 33 per cent while the industry average was 15 per cent.

Financial performance. Dabur registered a compounded annual growth rate (CAGR) of 14 per cent in revenues and 25 per cent in net profit, over the last five years. Sustained growth rate in its key categories has helped it register 18.32 per cent growth in sales in the September 2008 quarter as against the previous year’s quarter. Its international business (19 per cent of the total revenue) saw a good growth of 40.5 per cent led by robust performance in GCC (Gulf Cooperation Council), Egypt, Nigeria, Yemen and North African markets.

Its operating margin, however, slipped by 179 basis points on higher commodity prices, advertising cost and loss (Rs 5 crore) from its retail venture. But, cost management measures and pricing strategy helped net profit grow by 12 per cent for the September 2008 quarter. The health and beauty retail venture (which the company entered last fiscal) has also slowed down the pace of growth in earnings. This could continue to drag the profitability for a few more quarters as this business has long gestation period.

Growth plans. Dabur plans to strengthen its presence in the shampoo (revamped Vatika packaging and introduced Vatika black shine shampoo) and skin care categories. It is also strengthening its OTC portfolio (plans to launch ayurvedic skincare range) and is expanding its homecare portfolio (launched hard surface cleaner Dazzl). It is planning to launch fruit juices at different price points and is making packaging changes to the entire chyawanprash range. The new launches will be growth drivers over the next few years. The ayurvedic and herbal association is a plus.

Valuation. Going forward, if the current softening seen in the commodity prices continues, then the pressure on operating margins will ease. The price hikes seen during the previous quarter is also likely to improve the margins. At the current market price, the stock is trading 20.91 times its earnings, low when compared to players like Hindustan Unilever (25.9 times) and Nestle (27 times). Invest for steady returns and low downside risk.