Dabur India. Neutral. Rs93

Transcription

1 3QFY11 Results Update SECTOR: FMCG BSE SENSEX S&P CNX 18,022 5,417 Bloomberg DABUR IN Equity Shares (m) 1, Week Range (Rs) 112/79 1,6,12 Rel. Perf. (%) 5/-5/2 M.Cap. (Rs b) M.Cap. (US$ b) 3.5 Rs93 Dabur India Neutral Key takeaways from the concall The management indicated that the current inflationary environment did not have a major impact on FMCG consumption although a better picture would emerge over the coming months. Shampoo de-growth was led by sharp price corrections (40% extra milliliters) taken by Dabur and other shampoo makers. The management indicated that the recent price war in the shampoo market impacted category margins by ~10%. Exposure to Egypt is limited to 3% of sales and the Egyptian plant doesn't service sales in neighboring countries. Hence the impact of the recent turmoil is not likely to be significant. Slowdown, competition in domestic business a concern; estimates unchanged: Dabur India has been facing strong headwinds in the domestic business, which is reflected in the deceleration in volume growth and input cost pressure. We believe Dabur's reliance on the international business for its profit growth is rising (~76% of incremental profits in 9MFY11). We expect this to increase due to consolidation of Hobi and Namaste acquisitions and faster growth in existing international business; we believe the international businesses should trade at a discount to the P/ E of the India centric business due to scalability, currency risk, country risk and acquisitions of lower growth/lower margin profile businesses. Our estimates are largely unchanged for FY11 and FY12 (2% downgrade in FY13 estimates) as the profit accretion from acquisitions is offset by lower margins in the domestic business and higher depreciation of the consolidated entity. The stock trades at 23.5x FY12E EPS of Rs3.9 and 19.8x FY13E EPS of Rs4.7. Maintain Neutral. Amnish Aggarwal (AmnishAggarwal@MotilalOswal.com); Tel: /Nikhil Kumar (Nikhil.N@MotilalOswal.com); Tel:

2 Key takeaways from the concall The management indicated that the current inflationary environment had not had a major impact on FMCG consumption yet. The management indicated that FMCG product price increases had been lower than general inflation, which helped to improve relative affordability. However, a better picture will emerge over the coming months. The international business has been the strongest contributor to PAT accretion due to 20.3% sales growth and 23% EBITDA margins in 9MFY11. The management indicated that the SBU was likely to post 20%+ growth and ~25% EBITDA margins in coming years. Shampoo de-growth was led by sharp price corrections (40% extra milliliters) taken by Dabur and other shampoo players. Management indicated that the recent price war in the shampoo market impacted margins in the category by ~10%, but its market share had not contracted. It expects growth revival in FY11. Exposure to Egypt is limited to 3% of sales and the plant in Egypt doesn't service sales in neighboring countries. Hence the impact of recent turmoil is not likely to be significant. 3QFY11 results in line: international business accounts for ~60% of PAT accretion Consolidated sales grew 16.6% YoY to Rs10.8b helped by 10% volume growth, ~4% realization growth and the impact of the Hobi consolidation (3%). Gross margins contracted 300bp YoY to 51.6% due to a sharp increase in input costs and delay in taking price increases. However a cut in ad-spends (210bp), other expenditure (80bp) and staff costs (50bp) enabled EBITDA margin expansion of 30bp to 19.4%. Subsidiary sales grew 36% YoY (including the Hobi acquisition), led by a 220bp margin expansion. PAT grew 42.8%, accounting for ~60% of PAT accretion in 3QFY % sales growth (13.3% adjusted for Hobi) led by 14.6% volume growth Net Sales (Rs m) Grow th (% YoY) Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 7,787 7,317 7,683 8,480 9,262 8,488 9,165 9,728 10,800 Source: Company/MOSL 1 February

3 Stringent cost control enables margin expansion 14.4 EBITDA (Rs m) EBITDA Margins (%) Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec ,248 1,290 1,296 1,182 1,754 1,773 1,620 1,367 2,028 2,095 Source: Company/MOSL Volume growth 10%; deceleration across major categories Dabur's sales grew 16.6% led by 10% volume growth and 4% price increases. Consolidation of Hobi Kozmetic from 7 October 2010 added 3% to overall sales. We highlight that volume growth of 10% is the lowest in the past 10 quarters and significantly lower than ~15% volume growth reported in 1HFY11. Dabur Consolidated Segmental: Margin contraction across categories except Foods Year Ended March 3QFY11 3QFY10 % Chg 9MFY11 9MFY10 % Chg Net Sales (Rs m) 10,878 9, ,926 25, Consumer Care 8,668 7, ,237 19, Consumer Health ,291 2, Foods 1, ,684 3, Retail Others EBIT (Rs m) 2,654 2, ,211 6, Consumer Care 2,289 2, ,030 5, Consumer Health Foods Retail Others EBIT Margin (%) Consumer Care Consumer Health Foods Retail Others Source: Company/MOSL 3QFY11 sales growth decelerated across product segments except in skin care, foods and hair care. Rising inflation and competitive pressure in key segments will prevent a sharp increase in growth rates, at least in the medium term. Decelration in Major categories Category Growth (%) FY08 FY09 FY10 1QFY11 2QFY11 3QFY11 9MFY11 Hair Care Health Supplements Oral Care Foods Digestives Skin care Home Care IBD Source: Company/MOSL 1 February

4 In 3QFY11, hair care sales grew ~3.8%, shampoo sales contracted 29%, and Amla hair oil sales grew only 6% (up 14.9% in 1HFY11). However, Anmol coconut and Vatika hair oil sales grew 6% and 18%, respectively. Oral care sales grew 9.4% in 3QFY11, led by 18.7% sales growth in the toothpaste segment. Dabur Red grew 20.5%, Babool by 19.6% and Meswak by 13.1%. Health supplements grew 12.7%, led by Chayawanprash (up 15.5% in 3QFY11), Dabur Honey grew 9% in 3QFY11 and Dabur Glucose was flat. Skin care grew 18% in 3QFY11, led by Gulabari. Fem bleaches reported acceleration in growth as sales grew 21% in 3QFY11 (12% in 1HFY11). Home Care reported sharply lower sales with 24% growth in 3QFY11 (37% in 1HFY11). Odonil was a key growth driver with 53% growth in 3QFY11. Foods sales increased 42%, led by Real (44%) and Activ (33%). Homemade grew 33.6% due to high demand for cooking pastes in the current inflationary environment. International business accounts for ~60% of PAT International business sales grew 14.2% YoY (constant currency sales up 19.2%) and sales growth declined from 23.3% in 1HFY11. EBITDA margins were 28% mainly due to benefits of scale. The international business and profits are growing at a faster clip than the domestic business. The international business accounted for ~60% of incremental consolidated PAT for Dabur India in 3QFY11. Dabur India completed the acquisition of Hobi Kozmetik group with effect from 8 October 2010, reporting sales of Rs279m and PAT of Rs10m (annualized sales of Rs1.1b and PAT of Rs40m against CY09 sales of US$27m, or Rs1.1b, and EBITDA margin of 14%). Dabur completed the acquisition of Namaste Labs and it would be consolidated in the 4QFY11 financials. Hobi and Namaste will increase the share of international business to 30%, weakening the case for Dabur as a pure proxy on Indian consumption. Slowdown/competition in domestic business a concern; estimates unchanged Dabur India's domestic business has been facing headwinds, reflected in deceleration in volume growth and input cost pressure. We believe Dabur's reliance on its international business for profit growth is rising (~76% of incremental profits in 9MFY11). We expect this to increase due to consolidation of the Hobi and Namaste acquisitions and faster growth in the international business. We believe international businesses will trade at a discount to P/E of the India centric business due to scalability, currency risk, country risk and acquisitions of lower growth/lower margin profile businesses. Our FY11 and FY12 estimates are largely unchanged (2% downgrade in FY13 estimates) as the profit accretion from acquisitions gets offset by lower margins in the domestic business and higher depreciation of the consolidated entity. The stock trades at 23.5x FY12E of Rs3.9 and 19.8x FY13E EPS of Rs4.6. Maintain Neutral. 1 February

5 Dabur India: an investment profile Company description Dabur India is India's second largest FMCG company in terms of product portfolio. Dabur is a market leader in the 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 has given it a strategic presence in the high potential skin care segment. Key investment arguments Strong herbal positioning with little competition from MNCs in categories like hair oil, CHD and health supplements. Dabur has the second broadest product portfolio (after HUL) with a presence in high potential categories like skin care, hair care, oral care and health supplements. The company is likely to be under MAT for 7-8 years, resulting in tax savings. Key investment risks Dabur's standalone sales have been decelerating over the past three quarters and it has been highly dependant on international business for its PAT growth. We believe Dabur will face increasing competition in some key business segments: (1) toothpaste (likely entry of P&G), (2) hair oil (aggressive strategy of Marico and Emami), (3) shampoo (aggressive strategy of P&G, HUL and Garnier resulting in a squeeze in sales growth and margins) and (4) skin care (rising focus of MNCs on the mass to mid-premium segment). Recent developments Dabur increased prices by 4.1% YTD to offset input cost pressures. Dabur completed the acquisition of the Namaste group and the business will be consolidated from 4QFY11. Valuation and view Our EPS estimate is Rs3.2 for FY11, Rs3.9 for FY12 and Rs4.7 for FY13, implying a PAT CAGR of 20% over FY The stock trades at 23.5x FY12E EPS of Rs3.9 and 19.8x FY13E EPS of Rs4.6. Maintain Neutral. Sector view We have a cautious view on the sector given slow income growth in the economy, which might impact volumes and profit margins of companies. Companies with low competitive pressures and broad product portfolios will be able to better withstand a slowdown in a segment. Long term prospects appear bright, given rising incomes and low penetration. Comparative valuations Dabur Marico GCPL P/E (x) FY11E FY12E P/BV (x) FY11E FY12E EV/Sales (x) FY11E FY12E EV/EBITDA (x) FY11E FY12E EPS: MOSL forecast v/s Consensus (Rs) MOSL Consensus Variation Forecast Forecast (%) FY FY Target Price and Recommendation Current Target Upside Reco. Price (Rs) Price (Rs) (%) Neutral Stock performance (1 year) 115 Dabur Sensex - Rebased Shareholding Pattern (%) Dec-10 Sep-10 Dec-09 Promoter Domestic Inst Foreign Others Feb-10 May-10 Aug-10 Nov-10 Feb-11 1 February

6 Financials and Valuation 1 February

7 NOTES 1 February

8 For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah Phone: (91-22) Fax: (91-22) Motilal Oswal Securities Ltd, 3rd Floor, Hoechst House, Nariman Point, Mumbai This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement Dabur India 1. Analyst ownership of the stock No 2. Group/Directors ownership of the stock No 3. Broking relationship with company covered No 4. Investment Banking relationship with company covered No This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 1 February