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Aarati Krishnan

Mr Sunil Duggal, CEO... With the acquisition of Balsara brands, a wider product portfolio should drive revenue growth.

ACQUIRED brands can bring value to the buying company as Dabur India has found with its recent acquisition of Balsara's FMCG business. With a strong herbal positioning and an established presence in the household-care segment, Balsara's product basket appears to fit well with the Dabur portfolio. Anyway with its finances not stretched in sewing up this deal, Dabur may not even be worried too much if the acquired brands do not deliver as expected.

Reasonable price

Dabur India appears to have paid a reasonable price for acquiring such well-recognised Balsara brands as Promise, Babool and Meswak (toothpastes), Odomos (mosquito repellant), Odonil (room freshener), and Odopic and Sanifresh (cleaners). At Rs 143 crore, the acquisition price is at 70 per cent of the brands' combined revenues. In the past, acquirers in the FMCG space have paid as much or double a brand's revenues.

Dabur India has also acquired Balsara's manufacturing facilities in Himachal Pradesh (Baddi), Gujarat (Silvassa) and UP (Kanpur). The Baddi unit was set up only this year and will leverage on tax and excise duty concessions over the first ten years. Contributions from this unit may help improve the profitability of Balsara's busineses as they come under the Dabur fold.

No stretch

Usually several acquisitions tend to strain the finances of the acquirer leaving it with either bloated equity or debt. Not so, in this case. Dabur India can easily meet the cost for the Balsara purchase from a single year's operating cash flows.

Dabur India's working capital requirements fell into the negative zone last year, after the company freed up working capital through streamlining of inventory and procurement systems. Its liquid investments totalled Rs 130 crore in December 2004, and can fund the acquisition.

The company plans to use about Rs 20 crore of debt to fund the Balsara purchase, but this will barely cause a ripple in its financials. The debt on the balance-sheet will still add up to just 6 per cent of the shareholder funds, leaving the company room to borrow more if needed. As this is an all-cash deal, the buyout will have to impact on Dabur's equity base.

Dabur may have to spend significantly on advertising and promoting its new brands, if they are re-capture their market shares in the toothpaste segment. However, the structuring of the deal certainly enhances the comfort factor for shareholders, minimizing the impact on earnings in case the company is unable to ramp up the acquired brands' revenues or expand their market share, as planned.

Complementary products

Of the several regional toothpaste and household-care brands Balsara's appear to be a particularly good fit for Dabur because of their strong herbal association. Over the past couple of years, Dabur has been leveraging its strengths in ayurvedic healthcare to carve out a niche for itself in conventional FMCG categories such as toothpastes and shampoos.

Brands such as Meswak, Babool and Promise toothpaste, positioned on the herbal plank, could fit well into Dabur's gameplan. With the Balsara brands' combined market share of 6 per cent in the toothpaste market, Dabur will emerge the third largest player in the segment. Though Dabur's Lal Dant Manjan is the leading brand in the toothpowder market, the category itself has been shrinking. Given the likelihood of consumers upgrading, the toothpaste market appears to be the more lucrative one, especially now that it is on the revival path.

However, making further inroads into the toothpaste market is not likely to be easy, given the intensifying competition in this segment.

The two major plays Hindustan Lever and Colgate, with a sizeable war chest, have been slugging it out. Pricing pressures have also been evident in this segment, though not to the same extent as in shampoos or detergents. This is why the market shares of regional players such as Balsara and Anchor have been plateauing after an initial burst. Managing the integration and ensuring a smooth transition for the new brands - in terms of integrating the operations, sales force and distribution — usually prove a challenge to the acquirer. Any delay in this process can take the brands off the shelves and make a revival strategy that much more difficult.

Toehold in household

But even if the toothpaste market proves difficult for Dabur to break into, Balsara's household-care brands should provide a boost to its prospects. For one, the competitive pressures in the household-care market are far lower than in the toothpaste or shampoo segments. Second, household-care products also offer superior growth prospects on account of their low penetration levels.

With limited pricing pressures, they also offer higher profit margins. Balsara's household-care segment brands — Odonil and Sanifresh — are well entrenched. The mosquito repellant brand — Odomos — has established a niche for itself with its ointment formulation, in a competitive milieu consisting of coils, mats and liquids.

Shipshape core business

Dabur India's core business of consumer, healthcare products and foods is also in better shape than of its peers, thanks to its unique `Ayurvedic' positioning and a broad-based brand portfolio.

Though such categories as digestives and health supplements reported sluggish growth, the situation was salvaged in the past year by a revival in growth rates in shampoos, toothpastes and hair oils and strong double-digit growth in such areas as foods and baby care.

An expanding export presence for its brands also helped, as did cost-saving procurement strategies which leverage on technology.

Dabur's profit growth has been robust, in double-digits and well ahead of revenue growth due to efficiencies of manufacturing and procurement. Over the past couple of years, the company has steadily cut down on outsourcing, relying more and more on its new manufacturing facilities located in places that enjoy tax incentives. In the nine months ended December 2004, the company reported a 43 per cent growth in earnings, as operating profit margins expanded by two percentage points on the back of an 11 per cent growth in revenues.

Viewed in this context, the current price-earnings multiple of 20 times (trailing earnings) for Dabur India stock does not appear demanding, especially after the sharp re-rating of FMCG stocks over the past six months. Dabur now trades at a discount to MNCs such as Hindustan Lever and Nestle, but is on a par with Indian companies such as Britannia Industries.

Double-digit earnings growth, which is likely if the Balsara acquisition pays off, will drive up the Dabur India stock price over the long term. Buy with a two/three-year perspective.

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