Stock Review: DABUR

One of India's most diversified FMCG companies, Dabur India posted an impressive year-onyear growth in net sales for the March 2011 quarter. However, the increased material and packaging cost, interest, and depreciation and tax expense impacted the earnings growth.

   Net sales growth for the March quarter 2011 was 30.6% on consolidated levels over the corresponding quarter last year. This growth includes the consolidation of its latest acquisition, making year-on-year comparison inappropriate. Excluding this, the company has given an organic growth of 17%. For the Indian business, growth of 14% in net sales and 19% growth in net profit are quite impressive. One thing to be noted is the other expenditure in the consolidated results, which has gone up sharply, includes the input cost for its international subsidiaries.

   Despite the rising material costs, Dabur has managed to protect the fall in its operating margins at 19.1% versus 20% last year, thanks to increased product prices and delays in new product launches, which reduced ad spends.

   The ad spends to sales ratio for the March 2011 quarter was 11.5% against 13.6% last year. Dabur has been reducing its ad spends gradually to battle the inflationary pressures. A dwindling advertising expenditure runs the risk of causing consumer disconnect with long-term negative consequences. Dabur made two acquisitions in FY11 — Hobi and Namaste worth . 800 crore, in the Middle East and the US, respectively. This increased the debt to . 1,051 crore from . 179 crore and fixed asset to . 1,542 from . 677 crore. As a consequence, the depreciation and interest costs too have gone up. Also, the applicable tax rate for the fourth quarter was up at 22% against 16.2% year ago. All these together have impacted the net profit margin to reduce to 13.3% from 16% last year. In the past fiscal, we saw Dabur doing big investments and taking inorganic growth path.

   The international business now represents more than a quarter of the total sales. Weak growth and low margins in overseas markets pose a challenge for the company to earn a decent return on investment in FY12.

   The inflationary pressures are unlikely to ease anytime soon, which can prompt the company to go for another round of price hikes.