Stock Review: DABUR

DABUR, through its acquisition of the USbased Namaste Group catering to ethnic hair products in the US, Nigeria and South Africa, joined the ranks of other Indian mid-sized companies like Godrej Consumer Products and Marico selling products to African markets. However, the market seems to have given a thumbs-down to the acquisition as the stock closed almost 4% lower for the day.

   Prima facie, the acquisition seems to have come at a good EPS-accretive valuation. In the past three years, Namaste's revenues have grown at a compounded annual growth rate of around 12%, with 15% growth observed in CY2009. In CY2009, net profit of the company was around $10 million. Expected sales for CY2010 are $93 million with earnings before depreciation and tax of 13%. This means the company has been acquired at a little over one time the sales and a price to earnings multiple of 10.

   Considering the NYSE-listed Lo'real and P&G P/Es of 24.9 and 17.33, respectively, and industry average P/E of 16.6, the acquisition seems to be a good buy. Besides, the US company has a good portfolio of hair care products for Dabur to be interested in and leverage on. Dabur's hair care segment was the slowest growing in the September quarter. When the growth from company's domestic business markets seems to have slowed due to saturation and increased competition, the Namaste acquisition appears to have happened at the right time.
Dabur would finance the entire deal through foreign debt which would cost Libor + 1.65%, resulting in interest rate of around 2-3%. Though Namaste has a lower EBIDTA than the existing EBIDTA of Dabur, it would nevertheless improve the overall earnings per share (eps) of the latter. The financials of Namaste would be integrated with those of Dabur from the first quarter of CY2011.

However, the major concern underlying all the good news is the fact that it is an acquisition based in the US — a developed market which has historically been difficult to crack for most Indian companies. Though the company's hair care product is for the ethnic African and Caribbean population, it still earns 70% of its revenues from the US — an economy which has not been growing as other emerging markets. In July this year, Dabur's board approved raising debt of 2,000 crore. Till now, less than half of this amount has been used by the company for its two acquisitions — one being Namaste and the other being the Turkish company, Hobi Kozmetick. However, post this acquisition, the management indicates that it would now focus on integrating the two acquired companies. It remains to be seen how successful the company is in integrating the acquisitions and milking the acquired brands to its benefit.