The Hindu Business Line : Dabur India: Hold

With a slew of product launches expected to drive revenue growth in fast-growing categories such as home/skin-care and foods, Dabur is likely to sustain the growth momentum in the coming quarters.

Having successfully turned around Balsara's oral and home-care products, which it acquired last year, Dabur is expected to do a repeat in other categories; the company is building a large war chest for acquisitions in both the domestic and international markets.

At the current market price, however, the stock trades at about 33 times its trailing four-quarter per-share earnings, pricing in near-term benefits.

The first quarter performances of the consumer health, foods and international business divisions, all of which have been identified as growth drivers, have been relatively subdued compared to the spectacular growth rates registered in the corresponding previous period.

A pick-up in the growth rates of these categories would help accelerate earnings. However, even if they do not perform at the same pace as in the previous year, Dabur is likely to draw strength from the growth in some of the traditional product categories.

Traditional categories get a healthy look

A notable aspect of Dabur's performance in the first quarter has been the resurgent growth in hair oils, shampoos and oral-care. In these categories, Dabur is up against multinational giants such as Hindustan Lever, Procter & Gamble and Colgate Palmolive.

Hair oils, which include Vatika Hair Oil and Amla Hair Oil brands, grew 15 per cent. Vatika Shampoos, which saw sluggish growth in FY-06, registered an impressive growth of about 40 per cent. This is far ahead of the category growth of 5 per cent in April and May (according to AC Nielsen's estimates). Introduction of the one-rupee sachets helped volume growth.

While the toothpaste category has grown at a robust 12-15 per cent, marketing efforts have helped revive demand for Dabur's red tooth powder brand, Lal Dant Manjan, which grew at 10 per cent during the quarter after declining for two straight years. Balsara brands, Babool and Meswak continued to boost category growth. Dabur's famous Chyawanprash has got a fresh lease of life with the launch of variants such as the Chyawanshakti. Revenues from the brand doubled during the quarter, although on a low base. A revival in these traditional spending categories could mean that Dabur would be more resilient to a slowdown than previously.

Newer categories slow down...

After growing at a tearing rate through last year, the foods and the consumer health division (CHD) slowed down. Dabur's wholly-owned subsidiary, Dabur Foods, grew 14 per cent compared to 53 per cent in the corresponding previous quarter. CHD improved marginally compared to 40 per cent growth rate in the corresponding previous quarter, while the home-care segment, with Balsara brands Odonil (air freshener), Odomos (mosquito repellent) and Sanifresh (toilet cleaner), too, grew at a relatively sedate pace.

... but to pick up pace

However, the first quarter may not reflect the full year's performance. The food business was affected by the political disturbances in Nepal, which is the manufacturing hub for Dabur's fruit juices. With the situation in Nepal settling, one can look forward to better growth rates in the category. Juice brands Real and Real Activ continue to be popular, while heavy ad spends on the summer drinks brand, Coolers, is likely to spur growth.

A slew of brands was launched towards the end of the first quarter in the home-care category, which should translate into higher revenues in the second quarter. Dabur has also planned further launches in skin/hair-care categories.

In the case of the consumer health division, which markets Ayurvedic and Over-The-Counter drugs, Dabur hopes to acquire herbal or health supplement and OTC brands in the overseas markets.

However, the nature and timing of these acquisitions are uncertain and the division could remain relatively sedate in the near-term.

The buy-out pep

Given Dabur's ambitious target of doubling its revenues to Rs 4,000 crore by 2010, acquisitions are likely to remain an essential part of its growth strategy. With debt still a speck on its balance-sheet and substantial cash at its disposal, acquisitions of the Balsara kind are well within its reach.

Dabur has also recently passed an enabling resolution to raise $250 million from the overseas market to fund some of its big-ticket acquisitions, typically those that involve more than $100 million.