Microsoft word - mangal keshav_dabur_update_290110.doc

Yet another quarter of robust performance Analyst | Shishir Manuj | Tel : +91-22-67103043 | [email protected] Dabur reported strong volume-led numbers in line with our estimates. Despite softening in demand observed by most players, Dabur reported broadbased growth. With strong performance improvement in FemCare, management reinforced its acquisitions management track. Margins improved sharply despite spurt in marketing spend. We like the company for its wide portfolio, strong management and growth focus. We find the stock attractively priced and reiterate our BUY. Dabur is our top FMCG pick. Revenue grew 19% with 14% underlying volume growth. Except some slackness in hair and home care, most other segments reported strong growth. Translation losses during the quarter pulled down reported growth. 555bps yoy decline in GM offset sharp jump in A&P ratio driving OPM up 235bps to 19.5%. Operating profits were up 35%. Management does not see pressure on gross margins for the near-term. We see OPM holding up for some time, as A&P ratio leaves sufficient legroom to manage margins. While high food prices are being cited by most managements as hurting demand, we are pretty comfortable with Dabur’s current volume growth. However, value growth will turn down in absence of any major product inflation. The launch pipeline We like the sharp improvement in FemCare OPM (18.5% vs 12.7%), as management stays focuses on investing behind fewer brands and not trying too many things. Stock is trading at 23.6x EPS and 18.8x EV/EBITDA on 1-year rolling forward basis. We find valuations attractive for 20% 2-yr EPS CAGR, and much lower risk to growth. We reiterate our BUY call with a target price of Rs 186. Source :Company, Bloomberg, Mangal Keshav Research Estimates Source: Company, Mangal Keshav Research Estimates Mangal Keshav Securities Ltd. 301A-304, Kotia Nirman, Andheri (W), Mumbai – 400 053. Source: Company, Mangal Keshav Research Estimates Oral care surprised positively, hair care negatively: We are quite surprised by the strong growth in oral care led by toothpaste. This comes on the back of very sedate Dabur’s strong 18.8% revenue growth was driven by 14% growth in the last few quarters. We are raising our underlying volume growth. Both domestic and international estimates for oral care growth. However, hair care growth remained strong, although currency translation disappointed us. While hair oil was facing a strong base and did not witness price growth, anti-dandruff shampoos pulled down overall shampoos growth. We believe we will Sales growth backed up by high volume growth see some improvement going ahead as the company rolls out new extension nationally. International revenue growth was a little weaker compared to recent history, a part of which is explained by the strengthening Rs/USD. We had anyways estimated for a lower growth for the medium-term accounting for the increased size of the business. Source: Company, Mangal Keshav Research Volume growth consistent at higher levels 12.0 Overall sales growth hurt by deferral of 15.0 institutional sales. Company gained 30.4 performed well. Toothpowder managed 49.1 to stay flat, despite declining category. 25.0 Burrst to be launched nationally next Source: Company, Mangal Keshav Research Source: Company, Mangal Keshav Research Dabur gained market share in most key categories. Source: Company, Mangal Keshav Research Source: Company, Mangal Keshav Research; some data points have been restated helped deliver this improvement. Management continues to focus on the bleaching and depilatory products. OPM expanded 234bps driven by 555bps yoy lower material cost, despite hardly any product price hike taken. Recurring EPS grows 27%: Operating profits grew 34.8% Management indicated that they are adequately covered yoy driving up recurring EPS by 27% to Rs1.59. This was for the next quarter, although they were tentative for the despite a lower other income and higher effective tax rate year ahead. We see some input inflation build up, but this is likely to be more muted than most other FMCG Tweaking up estimates: Although the results are in line with companies due to the spread of inputs. We believe current our estimates, we are raising our estimates to account for OPM levels are sustainable over the next few quarters, as little slower revenue growth and higher gross margins. management has got back pricing power after no price hikes in the last few quarters. Besides, Q3FY10 saw 54% yoy higher A&P spend. While management believes A&P base ratios have moved up to around 13%, we believe this still allows management to leverage when under margin Source: Mangal Keshav Research Estimates Source: Bloomberg, Mangal Keshav Research Estimates Source: Company, Mangal Keshav Research. The stock is trading at 23.6x EPS and 18.8x EV/EBITDA on a 1-year forward basis. We find the valuations attractive based on the 20% EPS CAGR over FY10E-FY12E. We also see lower risk to growth compared to most other FMCG peers due to the diversified product and raw material portfolio and lower head-on competitiveness. Source: Company, Mangal Keshav Research Estimates Source: Company, Mangal Keshav Research. Femcare witnessing sharp improvement: We are quite impressed by the c.600bps improvement in FemCare’s OPM to 18.5% besides a strong growth that it has reported. Tighter cost control and better leverage benefits have Source: Company, Mangal Keshav Research Estimates Institutional Sales / Trading Desk Roshan Shah Disclaimer: 2006 Mangal Keshav Securities Ltd. All rights reserved This Report has been prepared by Mangal Keshav Securities Limited (MKSL) This Report is meant solely for use by the recipient and is not for circulation. This Report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this Report, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this Report and the income from them may go down as well as up, and investors may realise losses on any investments. Past performance is not a guide for future performance. 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