Dabur India Ltd DABUR IN; DABU.BO

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1 FMCG India Dabur India Ltd DABUR IN; DABU.BO Institutional Equity Research November 5, QF15 result review HOLD Current price (3 Nov) Rs 230 Target price Rs 230 Upside/(downside) % (0.2) Earning estimate Revised Market data Mkt capitalisation Rs bn Average daily vol ' week H/L Rs 236 / 154 Shares O/S mn Free float mn Promotor holding % 68.2 Foreign holding % 20.5 Face value Rs 1.0 Price performance (%) 1m 3m 6m 1yr Nifty (abs) Stock (abs) Relative to Index (1.1) Performance (Rs) 150 (50) Nov-13 Feb-14 May-14 Aug-14 Oct-14 Dabur (LHS) Source: Bloomberg, SSLe (%) Rel. to BSETMCG (RHS) Management confident of 2HF15 despite hiccups in 1HF15 Dabur India Ltd (Dabur) s 2QF15 results came in line with SSLe, with net profits just 3% lower than SSLe. Net sales grew 10% YoY and volume growth was 8.7% YoY falling on the lower side of the range, guided by the management. Domestic consumer care business grew 13.8% YoY and international business grew 17.5% YoY with 8.3% constant-currency growth. Gross margin declined 66bps YoY due to high cost inventory. Employee expenses increased 14.5% YoY due to Project Core. Ad-spends were flat during the quarter (+12.4bps YoY) and in line with sectoral trends witnessed this quarter. EBITDA, at Rs 3.5bn, was up 7% YoY and 10% below SSLe due to high input costs and employee expenses (in line with trend seen in 1QF15). PAT was at Rs2.9bn (up 15% YoY), led by higher other income and lower tax rate. We roll over our valuation to September 16 EPS of Rs7.5 and raise our target price to Rs230 from Rs180 earlier (exit multiple 30x) to align with sector valuations and maintain HOLD rating on Dabur. Foods business outshines all other segments in 2QF15: Foods business reported 29% growth (50% of which is volume led) this quarter on the back of early Diwali sales this year; as half of the sales for Diwali packs were booked in 2Q as opposed to 3Q last year. Adjusting for the same, growth was still upwards of 20%, marking the buoyancy in the segment despite uptick in urban markets falling short of the management s expectations. Dabur plans to double its capacity in Sri Lanka by adding an extra line this year, which will be operational next year, given strong demand for Real Fruit Juice in the local market, Africa and Middle East. Healthcare segment affected due to late monsoon: Health supplements reported a 10% YoY growth in 2QF15, which was half of the run rate seen in 1QF15, as flagship brand Dabur Chyawanprash reported moderate growth due to extended summers. OTC and Ethicals grew 7.5%, which was a shade better than 1QF15 (+4.4%), as the segment was impacted due to late onset of monsoon. Hair care reported a healthy growth in perfumes as well as coconut hair oils. Overall volume growth in non-foods business was in mid-single digits, which is expected to pick up with revival in urban markets by 4QF15e. Maintain our margin estimate for F15e: EBITDA margin for Dabur in 1HF15 fell 40bps despite benign raw material inflation due to high cost inventory and increase in employee expenses (due to addition of sales force under Project Core). However, we maintain our margin estimate for F15e at 16.8%, as a) full impact of price increase will flow into 2HF15e, b) sales mix will be skewed towards high margin non-food business in 2HF15e and c) benefit of benign crude oil linked derivatives will flow in 2HF15e. Raise TP to Rs230; maintain HOLD rating: We roll over our valuation to September 16 EPS of Rs7.5 and raise our target price to Rs230 from Rs180 earlier (exit multiple 30x) to align with sector valuations and maintain HOLD on Dabur. Sagarika Mukherjee sagarika.mukherjee@sbicapsec.com Financial summary Y/E March (Rs mn) F13 F14 F15e F16e F17e Sales 61,691 70,944 80,643 93, ,928 Growth(%) EBIDTA margin (%) Core PAT 7,348 9,138 10,332 12,106 14,162 Core EPS (Rs) Growth(%) P/E (x) EV/EBITDA(x) Dividend yield (%) RoCE(%) RoE(%) Source: Company, SSLe SBICAP Research on Bloomberg SBICAP <GO>, Please refer to our disclaimer given at the last page.

2 Volume growth at 8.7% YoY; volume growth guidance not expected to fall below 8% in 2HF15 Employee expenses on an uptrend due to hiring of extra sales force under Project Core Margin shrank due to high cost inventory and higher employee expenses Quarterly Financials Y/E March (Rs mn) 2QF15 2QF14 YoY (%) 1QF15 QoQ (%) 2QF15e Var. (%) Net Sales 19,296 17, , ,300 (4.9) COGS 9,034 8, ,226 (2.1) 9,211 Gross Profit 10,262 9, , ,089 (7.5) Gross Margin(%) (66.4) Employee Expenses 1,825 1, , ,950 (6.4) Share of sales(%) Ad-spends 2,534 2, ,863 (11.5) 2,750 (7.9) Share of sales(%) (14.3) 14 Other expenses 2,395 2, , ,500 (4.2) Share of sales(%) (52.2) EBITDA 3,509 3, , ,889 (9.8) EBITDA Margin(%) (64.2) Depreciation EBIT 3,217 3, ,413 3,639 (11.6) Interest costs Other income Extraordinary items PBT 3,503 3, , ,739 (6.3) Tax Tax Rate(%) (119.5) PAT 2,888 2, , ,969 (2.7) Minority interests Net Profit 2,875 2, , ,966 (3.1) NPM(%) Source:Company, SSLe Introduce F17e estimates; maintain F15e/F16e: We introduce F17e with volume 8% growth assumption and 5% realization growth. We expect Dabur to post top line- and bottom-line growth of 14% and 17% in F17e, respectively, with flat margin expectations, as we expect any upside on sales growth or benign raw material inflation will be ploughed back into ad-spends and variable pay component for increasing distribution reach under Project Core. Key assumptions F15e F16e F17e Net sales growth (%) COGS(%) Employee expenses(%) Ad-spends (%) EBITDA growth(%) EBITDA margin (%) Source: SSLe sagarika.mukherjee@sbicapsec.com November 5,

3 1-year forward rolling P/E chart 38 1-year forward P/E band (x) 24 (Rs) Apr-04 Nov-04 Jun-05 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 price (Rs) Average 1-Std (-) 1 Std 0 Apr-04 Nov-04 Jun-05 Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10 Apr-11 Nov-11 Jun-12 Jan-13 Aug-13 Mar-14 Oct-14 Price 18x 20x 25x 30x 32x 34x Source: Bloomberg, SSLe sagarika.mukherjee@sbicapsec.com November 5,

4 Financials Income Statement Balance Sheet Y/E Mar (Rs mn) F13 F14 F15e F16e F17e Y/E Mar (Rs mn) F13 F14 F15e F16e F17e Net sales 61,691 70,944 80,643 93, ,928 Cash & Bank balances 3,614 5,191 7,350 12,917 19,997 growth (%) Other Current assets 15,452 18,041 20,032 23,219 26,438 Operating expenses 52,193 59,389 67,113 78,253 89,145 Investments 9,286 10,765 11,265 11,765 12,265 EBITDA 9,498 11,555 13,529 15,658 17,784 growth (%) Net fixed assets 10,531 11,672 11,767 12,185 12,534 Depreciation &amortisation ,288 1,332 1,402 Goodwill & intangible assets 6,214 6,214 6,214 6,214 6,214 EBIT 8,651 10,580 12,242 14,326 16,382 Other non-current assets 1, Other income 1,089 1,315 1,556 1,948 2,562 Total assets 46,995 52,669 57,414 67,086 78,233 Interest paid Extraordinary/Exceptional items Current liabilities 12,854 17,921 16,660 19,263 21,933 PBT 9,150 11,354 13,246 15,722 18,392 Borrowings 12,577 7,621 7,621 7,621 7,621 Tax 1,826 2,191 2,914 3,616 4,230 Other non-current liabilities Effective tax rate (%) Total liabilities 25,923 25,951 24,690 27,293 29,963 Net profit 7,324 9,163 10,332 12,106 14,162 Minority interest (23.7) Share capital 1,743 1,743 1,743 1,743 1,743 Reported Net profit 7,348 9,138 10,332 12,106 14,162 Reserves & surplus 19,209 24,816 30,822 37,891 46,368 Non-recurring items Shareholders' funds 20,952 26,559 32,565 39,634 48,110 Adjusted Net profit 7,348 9,138 10,332 12,106 14,162 Minority interest growth (%) Total equity & liabilities 46,995 52,669 57,414 67,086 78,233 Key Financials ratios Cash Flow Statement Y/E Mar F13 F14 F15e F16e F17e Y/E Mar (Rs mn) F13 F14 F15e F16e F17e Profitability and return ratios (%) Pre-tax profit 9,530 11,346 13,246 15,722 18,392 EBITDAM Depreciation ,288 1,332 1,402 EBITM Chg in working capital 859 2,477 (3,251) (585) (548) NPM Total tax paid (1,685) (2,191) (2,914) (3,616) (4,230) RoE Other operating activities (856) (773) (1,004) (1,396) (2,010) RoCE Operating CF 8,696 11,835 7,364 11,457 13,005 RoIC Capital expenditure (2,410) (2,117) (1,750) (1,750) (1,750) Per share data (Rs) Chg in investments (3,543) (500) (500) (500) (500) O/s shares (mn) 1,743 1,743 1,743 1,743 1,743 Other investing activities 714 1,315 1,556 1,948 2,562 EPS Investing CF (5,240) (1,302) (694) (302) 312 FDEPS FCF 6,286 9,718 5,614 9,707 11,255 CEPS BV Equity raised/(repaid) DPS Debt raised/(repaid) 869 (4,955) Dividend (incl. tax) (2,830) (3,570) (4,326) (5,037) (5,685) Valuation ratios (x) Other financing activities (341) (541) (552) (552) (552) PE Financing CF (2,302) (9,067) (4,878) (5,589) (6,237) P/BV EV/EBITDA Net chg in cash & bank bal. 1,154 1,466 1,793 5,566 7,080 EV/Sales Closing cash & bank bal 3,614 5,191 7,350 12,917 19,997 Other key ratios D/E (x) (0.1) (0.3) DSO (days) Du Pont Analysis - RoE NPM (%) Asset turnover (x) Equity multiplier (x) RoE (%) Source: Company, SSLe sagarika.mukherjee@sbicapsec.com November 5,

5 Recommendation History Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 (Rs) BUY HOLD SELL Stock Price Target Price Date Stock Price TP Rec. 12-Feb BUY 6-May HOLD 25-Jul HOLD 29-Oct HOLD 24-Jan HOLD 30-Apr HOLD 28-Jul HOLD 3-Nov HOLD Source: Bloomberg, SSLe SBICAP Securities Limited Corporate Office: Mafatlal Chambers, A-Wing, 2nd Floor, N. M. Joshi Marg, Lower Parel, Mumbai Tel.: /01 Fax: KEY TO INVESTMENT RATINGS (w.e.f. February 2013) Guide to the expected return over the next 12 months. 1=BUY (expected to give absolute returns of 15 or more percentage points); 2=HOLD (expected to give absolute returns between -10 to 15 percentage points); 3=SELL (expected to give absolute returns less then - 10 percentage points) DISCLAIMER I, Sagarika Mukherjee M. Sc. 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