DABUR INDIA LIMITED RESEARCH

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1 RESULTS REVIEW Dabur India Limited Hold Share Data Market Cap Rs bn Price Rs BSE Sensex 14, Reuters Bloomberg Avg. Volume (52 Week) DABU.BO DABUR IN 0.3mn 52-Week High/Low Rs. 134 / 72 Shares Outstanding Valuation Ratios (Consolidated) Year to 31 March 2009E 2010E EPS (Rs.) /- (%) (0.4)% 18.4% PER (x) 26.2x 22.1x EV/ Sales (x) 3.0x 2.6x EV/ EBITDA (x) 18.6x 15.8x Shareholding Pattern (%) Promoters 71 FIIs 11 Institutions 11 Public & Others 7 Relative Performance Aug-07 Sep-07 Oct-07 DABUR Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Rebased BSE Index Aug-08 Finding ways to maintain margins During Q1 09, Dabur and other FMCG companies were adversely impacted by the inflation-driven cost escalation. As a result, EBITDA margin and net margin decreased by 78 bps and 71 bps, respectively. Although the Company is investing heavily to improve its operations, macro-level headwinds remain strong, and can limit the positive impact of the various cost measures being undertaken by the Company. Revenues maintain the growth momentum: Net sales grew by 16% yoy to Rs bn, driven by an 11% volume growth. Core Consumer Care (CCD) grew by 13.3%. We believe the Company s constant efforts to bring in new variants and give a face lift to its products will help it to grow its revenues at a CAGR of 14.2% during FY Margins to remain under stress: The Company has admitted that gross margins may fall by around 80~100 bps for FY09 due to its inability to fully pass on the burden of escalating raw material costs to the consumers. Besides, we believe that higher fuel and advertising costs will drag down EBITDA margin to around 16% for FY09. Although the Company has announced its decision to exit the loss-making soap business and reduce its retail outlet plans to 5-6 stores for FY09 instead of 8-10 outlets, the upside on margins will be visible only in FY10. Rich valuation leaves limited upside: Dabur s stock is trading at a high premium at 26.2x for FY09E EPS, compared with its peers at 18.6x. Besides, our DCF model gives a value of Rs Therefore, we see limited upside potential in the stock and reiterate our Hold rating on the stock. Key Figures (Consolidated) Quarterly Data Q1'08 Q4'08 Q1'09 YoY% QoQ% (Figures in Rs. mn, except per share data) Net Sales 5,208 6,065 6, % (0.4%) EBITDA % (10.9%) Net Profit % (15.4%) Margins(%) EBITDA 15.2% 16.1% 14.4% NPM 10.4% 11.5% 9.7% Per Share Data (Rs.) Adjusted EPS % (11.8%) -1-

2 Result Highlights Adj. net profit declined due to significantly higher taxes Net sales for Q1 09 grew 16% yoy to Rs bn. The 13.3% growth in the consumer care business and a robust growth in the international business contributed significantly to the Company s overall growth. EBITDA margin for the quarter declined to 14.4% on account of a high raw material and employee costs. Adj. net profit for the quarter grew 8.1% to Rs. 588 mn; the subdued growth in net profit was primarily due to the higher tax rate of 15.2% in the current quarter, compared with 13.9% in the base year. Cost Analysis Period Inc/Dec as % of Net Sales Jun-07 Mar-08 Jun-08 yoy% qoq% Raw materials 45.3% 40.5% 43.7% -1.5% 3.3% Purchase of traded goods 10.8% 3.4% 14.1% 3.3% 10.7% Advertising Exp. 13.3% 12.3% 13.5% 0.2% 1.2% Employee Exp. 8.6% 8.8% 8.8% 0.2% 0.0% Other Exp. 14.1% 16.7% 13.6% -0.5% -3.1% Source:Company, Indiabulls Research Segmental Highlights Consumer Care Division (CCD), which contributed approximately 76.6% to the total revenue, grew by 13.3% yoy to Rs. 4.7 bn with a fair performance across all categories. The hair care category grew by 15%, dominated by Dabur Amla hair oil and the new mustard oil variant that has also been received well in the market. The Vatika brand too is getting a good response for its new conditioners. Meanwhile, oral care grew by a modest 5%, led by a strong performance of the red tooth paste. The category showed modest results because of the repackaging of Meswak and Babool and the write-off of the old stock. However, due to higher material cost, EBIT grew by a mere 10.6% to Rs. 1.1 bn and margin dipped 61 bps to 24.3%. -2-

3 Segment's contribution to Revenue IBD 3% Source:Company Data Food 14% CCD 76% CHD 7% Consumer Health Division (CHD) grew 24.9% yoy to Rs mn after a shallow performance during the last few quarters. The Health Supplements business grew by more than 19%. The Company has received a fair response to the promotions of its Ayurvedic portfolio. It is also expanding its product portfolio with plans to launch an ayurvedic skin care range by the third quarter. Dabur India had forayed into the skin care market last year with the launch of rose-based products under the 'Gulabari' brand name. Consequently, the segment s return on capital employed went up to 18.4% during the quarter, compared with 15.5% for the corresponding quarter last year. Thus, we are optimistic in our estimates on the proposed new investments in the segment. International Business recorded a robust growth of 40% yoy during the quarter. The Company has been receiving an improved response from Egypt, the Middle East, and other African nations. The division continues to maintain a strong growth momentum with significant investment in the branding and distribution network. Health & Beauty (H&B) s health, wellness, and beauty chain New-U was launched in Q3 07. Since then, four more stores have been opened, bringing the total to 7 stores. The management has revised its plans of opening around 8-10 stores to 5-6 stores by 2008 end in order to capitalise on the downtrend in the rentals. Key Events The Company plans to invest over Rs. 2.5 bn in the next two years to ramp up capacities. In addition to a Rs bn brown field expansion this fiscal, Dabur would set up a Rs bn green field plant in the next fiscal in one of the hill states to avail fiscal incentives. Stepping up its efforts to curb counterfeit products in the market, Dabur and local authorities busted a racket involving the manufacture of spurious Dabur Amla Hair Oil in the national capital region. The raids were conducted in Delhi, Kolkata, and Agra amongst other cities. Goods worth more than Rs. 10 mn were seized through these raids. -3-

4 Key Risks The main upside risk to our Hold rating is better growth across key categories, driven by pricing power. However, a sustained price war is a downside risk as it might further erode margins. Outlook After considering the Company s consolidated performance and the prospective growth plans, we expect net sales to grow at a CAGR of 14.2% over FY08 10E. However, we maitain our EBITDA margin at 16% for FY09 because of higher advertising, fuel and material costs. To tackle the cost problem, the Company is planning several initiatives to protect its bottom line. Some of these initiatives are: An investment of more than Rs. 2.5 bn to develop brown field and green field projects in hill states will enable the Company to benefit from the MAT till Dabur has slowed down its retail expansion plans foreseeing a downward trend in rentals. This should prevent the Company from locking itself into high rentals. The Company intends to increase its prices in the second and third quarter with a full-year guidance of 7-8% in order to maintain its growth as well as to partially pass on the cost burden to the consumers. The Company has decided to exit the unprofitable soap business, which has consistently shown poor performance. Valuation We have valued Dabur by using the DCF model and have arrived at a target price of Rs For this, we have assumed 9% Rf, 14.6% WACC, and 5% terminal growth rate. At the current price, the stock is trading at a forward PE of 26.2x for FY09E and 22.1x for FY10E. When compared with its peers, we conclude that the stock is trading at a high premium for FY09E EPS (26.2x -4-

5 for the Company comapred with 18.6x for its peers). Therefore, we see limited upside potential in the stock and maintain our Hold rating. Key Figures (Consolidated) Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%) (Figures in Rs. mn, except per share data) (FY08-10E) Net Sales 17,228 20,431 23,607 26,911 30, % Adj. EBITDA 2,866 3,497 4,187 4,296 5, % Adj. Net Profit 2,136 2,563 3,066 3,054 3, % Margins(%) EBITDA 16.6% 17.1% 17.7% 16.0% 16.4% NPM 12.4% 12.5% 13.0% 11.3% 11.7% Per Share Data (Rs.) Adj. EPS % PER (x) 25.1x 32.3x 26.1x 26.2x 22.1x -5-

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