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Sunday, Nov 06, 2005

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Dabur India: Buy

Aarati Krishnan

INVESTORS with a medium term investment horizon can consider exposures in the Dabur India stock at the current price of Rs 166. The consumer goods sector is reviving from a prolonged downturn. Investing in the Dabur India stock appears to be one of the best ways to capture this revival. The stock has undergone substantial re-rating over the past couple of years. At 25 times its trailing 12-month earnings (Rs 6.6 per share), Dabur's valuation is now on par with MNCs such as Hindustan Lever, and at a premium to its Indian peers in the FMCG space. But this appears justified given the breadth of Dabur's product portfolio that few FMCG companies ( except HLL) can rival, and its superior growth prospects in emerging niche segments such as foods, beauty and household care. Rich valuations may curtail near term upside on stock price.

Dabur India has managed a substantial ramp-up in its FMCG business after the de-merger of the pharma business into a separate company in 2003. Between 2002-03 and 2004-05, revenues have grown from Rs 1,048 crore to Rs 1,269 crore and profits after tax from Rs 72 to Rs 148 crore, despite sluggish growth rates in the FMCG space. The company has also been quick to integrate and turn around the operations of Balsara Home Products, acquired last year.

The company's portfolio now straddles wide variety of consumer businesses. The breadth of its brand portfolio imparts a high degree of stability to earnings and makes Dabur less vulnerable to competitive pressures in specific segments.

Dabur has so far had limited success with establishing its brands in conventional FMCG categories, such as shampoos and toothpaste, where there are dominant players. But categories such as household care, food, beauty and baby care are under-penetrated and offer substantial scope for scaling up of revenues. Given the strong herbal association with Dabur's brands, there are also a slew of products in its Ayurvedic and healthcare portfolio that it can leverage for growth. Dabur's success with branding generic products such as Chyawanprash, honey and rosewater is an indication of the possibilities in this business. Competitive as well as pricing pressures are relatively muted in categories such as household care, fruit juice and health products, areas where Dabur has established its toehold. The company's efforts to acquire a pan-India presence in Asian and West Asian markets have also yielded good results.

In the first half of 2005-06, Dabur India's consolidated financials, which capture results for the Balsara and foods business, showed a 23 per cent growth in topline and a 53 per cent growth in profits after tax. A portion of the robust growth for this period is not of a sustainable nature. The Balsara acquisition has bolstered revenues and savings in excise duty (due to shifting of manufacturing to tax-free zones) have bumped up profit margins.

However, going forward, robust volume growth in nascent FMCG categories that find place in Dabur's portfolio, should help the company deliver a growth in earnings that is superior to the sector as a whole.

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