Dabur India. CMP: INR130 TP: INR135 Neutral

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1 BSE SENSEX S&P CNX 18,625 5, October QFY13 Results Update Sector: Consumer Dabur India CMP: INR130 TP: INR135 Neutral Bloomberg DABUR IN Equity Shares (m) 1, Week Range (Rs) 139/92 1,6,12 Rel. Perf. (%) 5/10/25 M.Cap. (INR b) M.Cap. (USD b) 4.2 Dabur's 2QFY13 results were mixed, with consolidated sales exceeding our estimates and Adj PAT at INR2.02b, though up 16% YoY, missed our estimate of INR2.12b by 5%. Performance in cash cow hair oils and oral care segments continues to remain modest. Company is seeing the benefits of recent rural distribution expansion in 10 states. Consolidated sales growth at 20.6% was above estimate led by better-than-expected volume growth of 10.5%. Consolidated gross margin expanded 110bp to 50.6% on the back of easing input costs and price hikes. EBITDA margin declined 180bp to 14.1% due to higher ad expenses (up 180bp). While EBITDA grew a modest 9.3% to INR2.6b (est INR2.8b), the 13.5% decline in interest cost and 61% jump in other income, coupled with a lower tax rate (down 120bp), resulted in 16.4% PAT growth to INR2.02b (est INR2.12b). Standalone domestic FMCG sales posted a healthy 15% growth due to 9% volume uptick, driven by shampoo, foods, skin care and home care segments. Oral and hair segments underperformed. International division posted a strong 25% revenue growth led by INR depreciation (constant currency organic growth at 16%). GCC and Nigeria outperformed with 21% and 20% growth, respectively. We believe Dabur's distribution expansion can provide staggered volume benefits in 2HFY13 and FY14. Sustained brand investments, post 2HFY12, aided in good volume growth momentum for the company. However, continued underperformance in hair oil and oral care remains a concern. We maintain FY13 and FY14 estimates and assume PAT CAGR of 20% for FY The stock trades at 29.5x FY13E and 24x FY14E EPS. We value Dabur at 25x FY14 EPS and arrive at a one-year forward target price of INR135, a potential upside of 5%. Maintain Neutral. Increase in input costs constitutes the key risk. Gautam Duggad (Gautam.Duggad@MotilalOswal.com); Sreekanth P V S (Sreekanth.P@MotilalOswal.com); Investors are advised to refer through disclosures made at the end of the Research Report.

2 Dabur 2QFY13 conference call highlights Volume growth in domestic business - 9%, Demand scenario - marginal moderation in demand across urban as well as rural. Volume guidance %. Cautious due to high input cost - will lead to price hikes. Targeting 10% volume growth in domestic business. Domestic FMCG business grew 15% - but commodity exports went up significantly - hence stand-alone sales growth is higher at 18.6% Gross margin guidance - dramatic increase in MENA. But India input cost trend has been mix. Don't see more than 100bp gross margin expansion ahead. Rural growing ahead of Urban. Rural growing at 20% vs. 10% in Urban (included CSD). Excluding CSD, Urban growth is 13%. Gross margins has gone up by ~400bp in Rural. It used to be 41-42% couple of years back and now stood at 45-46%. Focus on Oral Care has shifted to profitability. Babool - 50% of Oral Care portfolio - impacted by price hike. Should be able to get Babool on track by year end both in terms of margins and growth. Red toothpowder - marginal decline. Has seen steady erosion of margins due to high input costs. Skin Care - substantial mkt share gains in Bleach segment. Largely volume driven growth in segment (~20% volume growth out of 25% revenue growth). Significantly higher growth in Rural but Urban still forms big chunk of Skin Care. Perfumed Hair Oil - posted 16.3% growth. Amla Hair Oil - double digit growth. CSD - Worst is behind. 2Q saw a decline of 17%. Should get back to flat growth in FY13 after seeing de-growth in 1H. 400bp expansion in gross margins in international division - driven by favorable material cost environment. High base and mismatch of festive season - impacted Foods growth. Foods margins impacted by currency depreciation. Ad-spends - will be slightly higher going ahead. Domestic ad-spends should be significantly higher going ahead. Higher other expenses - up 30% - driven by increase in overheads due to distribution expansion initiative. Capex for FY13- INR Bn. 29 October

3 Consolidated, standalone domestic volumes up 10.5% and 9% respectively; con EBITDA margin down 180bp despite 110bp increase in gross margin Consolidated sales grew 20.6%, with volumes up 10.5%. This is the third consecutive quarter of double digit volume growth. Dabur's strategy of expanding the rural distribution footprint in identified 10 key states is helping the volume momentum, in our view. Management is targeting 10% volume growth for FY13. Consolidated gross margin expanded 110bp to 50.6% on the back of easing input costs and price hikes. Management expects gross margin to expand ~100bp in 2HFY13. Consolidated EBITDA margin declined 180bp to 14.1% due to higher ad expenses (up180bp). While EBITDA grew a modest 9.3% to INR2.6b (est INR2.8b), the 13.5% decline in interest cost and 61% jump in other income, coupled with a lower tax rate (down 120bp) resulted in 16.4% PAT growth of INR2.02b (est INR2.12b). Standalone sales growth was 15% at INR10.4b, with volumes up 9%. Gross margin expanded 30bp to 46.9%, while EBITDA margin declined 150bp YoY to 18.8% due to a 165bp increase in ad spend; EBITDA grew 10.1%. Despite the steep increase in interest cost from INR14m to INR90m, a 60% growth in other income enabled the Adj PAT growth of 11.8% at INR1.55b. Con sales up 20.6% driven by 25% growth in international business consol volumes grew 10.5% Gross margin up 110bp but EBITDA margin declines 180bp Source: Company, MOSL 29 October

4 Domestic business: home care, skin and foods shine; oral and hair care underperform Hair oils posted 9.1% growth led by double digit growth in Amla hair oil, 16.3% growth in perfumed hair oils, while Vatika reported a modest growth. Shampoos posted 40.2% growth on a low base. Vatika shampoo performed well and Vatika Premium Naturals was relaunched with new packaging. Oral care posts sub-par 6.5% growth: Toothpastes grew 10.2%, with Meswak and Dabur Red performing well, while Babool sales continue to remain under pressure due to recent pricing action. Dabur is focusing more on Babool margins and plans to introduce value-added products for the brand. Skin care growth was robust at 24.8%, with Fem growing at 27.7% led by bleaches and double digit growth from Gulabari. Home care posted 23% growth led by Odomos and Sanifresh. Foods segment grew 18.1%, largely volume led with Real performing well for the company. OTC and ethicals grew 22.6%, while Digestive grew 11.9%, health supplements grew 15.7% during 2QFY13. Company has been aggressively investing in brands and we expect it would continue to gain market share. However, we believe aggressive ad spends shall keep profit margins under check. CCD margin expands; foods contract due to INR depreciation Y/E March 2QFY13 2QFY12 % Chg Net Sales (INR m) 15,226 12, Consumer Care 12,638 10, Foods 1,758 1, Retail Others EBIT (INR m) 3,284 2, Consumer Care 2,897 2, Foods Retail (30) (27) 9.5 Others EBIT Margin % Consumer Care Foods Retail (21.3) (28.9) 7.6 Others Source: Company, MOSL IBD and Foods record impressive growth Category Growth (%) 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 Hair Care Health Supplements Oral Care Foods Digestives Skin care Home Care IBD (organic) Source: Company, MOSL 29 October

5 International business: GCC, Nigeria outperform International business' organic sales grew 24.8%. Growth was largely led by GCC (21% in constant currency), Egypt (16%) and Nigeria (20%). Namaste sales for the quarter were under pressure as the company is realigning its distribution in Africa and branding in the US. Hobi reported healthy growth in domestic and international markets as it is expanding distribution and investing in brands. Gross margin expanded by 400bp due to favorable material cost environment. Valuation and view: distribution expansion to provide staggered volume benefits; maintain estimates and Neutral rating We believe Dabur's distribution expansion can provide staggered volume benefits in 2HFY13 and FY14. Sustained brand investments, post 2HFY12, aided in good volume growth momentum for the company. However, continued underperformance in hair oil and oral care remains a concern. We maintain FY13 and FY14 estimates and assume PAT CAGR of 20% for FY The stock trades at 29.5x FY13E and 24x FY14E EPS. We value Dabur at 25x FY14 EPS and arrive at a one-year forward target price of INR135, a potential upside of 5%. Maintain Neutral. While improving gross profitability in the international division is a key positive, an increase in input costs constitutes the key risk. 29 October

6 Dabur India: an investment profile Company description Dabur India is the second largest FMCG company in India, in terms of Product portfolio. Dabur is a market leader in Chyawanprash category and is increasing its presence in other traditional categories like Hair Care, oral care, household care and foods. Dabur's acquisition of Fem Care given it a strategic presence in the high potential skin care segment. Key investment arguments Strong herbal positioning with little competition from MNC in categories like Hair Oil, CHD, Health Supplements etc. Dabur has the second broadest product portfolio (after HUL) with presence in high potential categories like skin care, hair care, oral care and Health supplements. The company is likely to be under MAT for the next 7-8 years, resulting in huge tax savings. Key investment risks Higher than anticipated ad spends could impact profitability adversely. We believe that will face rising competitive intensity in some of the key business segments; 1) Toothpaste (likely entry of P&G) 2) Hair Oils (aggressive strategy of Marico and Emami) 3) Shampoo (aggressive strategy of P&G, HUL, Garnier etc resulting in Comparative valuations Dabur Marico GCPL P/E (x) FY13E FY14E P/BV (x) FY13E FY14E EV/Sales (x) FY13E FY14E EV/EBITDA (x) FY13E FY14E squeeze in sales growth and margins) and 4) Skin care (rising focus of MNCs on the mass to mid premium segment). Recent developments Dabur is expanding rural distribution network in ten states as part of Project Double New products such as hair serums and professional hair care products under the Vatika brand were launched. Valuation and view Our EPS estimate stands at INR4.4 for FY13E and INR5.4 for FY14E, implying a PAT CAGR of 20% over FY12-14E. The stock trades at 29.5x FY13E and 24x FY14E EPS. Maintain Neutral. Sector view We have a cautious view on the sector on back of inflationary tendency, volatile input cost environment and a possible slowdown in the rural economy. Companies with low competitive pressures and broad product portfolios will be able to better with stand any slowdown in a particular segment. Longer term prospects bright, given rising incomes and low penetration. EPS: MOSL forecast v/s consensus (INR) MOSL Consensus Variation Forecast Forecast (%) FY FY Target Price and Recommendation Current Target Upside Reco. Price (INR) Price (INR) (%) Neutral Stock performance (1 year) Shareholding pattern (%) Sep-12 Jun-12 Sep-11 Promoter Domestic Inst Foreign Others October

7 Financials and Valuation 29 October

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