Management Discussion and Analysis

002-03 was a mixed year for the Indian economy. The

To combat these trends and protect their market share, most companies have resorted to volume discounts, freebies, two-for-one and other consumer promotion schemes. In addition, well-established players in the industry are facing tough competition from new entrants as well as regional companies, who are making inroads into the market with aggressive price offerings. All these factors are putting further pressure on the sales realisations as well as margins of almost all FMCG companies.

industrial and manufacturing sectors staged a modest recovery. The former grew by 6.1 per cent and the latter by 5.7 per cent, compared to 3.3 per cent and 2.7 per cent respectively, in 2001-02. However, a decline of 3.1 per cent in agricultural output resulted in GDP growing by just 4.4 per cent in 2002-03, as against 5.6 per cent growth in 2001-02. Chart A gives the data.
Chart A : Sectoral Growth (%)
5.6 4.4 4 2 0 -2 -4 GDP -3.1 Agriculture 2001-02 2002-03 Industry Services 3.3 5.7 6.1 6.8 7.1

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Your Company had to perform under these demanding market conditions. Given the unfavourable environment, we have reasons to be satisfied with our performance. Here are some of the salient features of our financial performance in 2002-03.
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Revenue from operations increased by 5.9 per cent, from Rs.1,163.2 crores in 2001-02 to Rs.1,232.3 crores in 2002-03.

Note : All figures are CSO estimates for April-March.

Profit Before Depreciation, Interest and Taxes (PBDIT) grew by 11.8 per cent, from Rs.120.5 crores in 2001-02 to Rs.134.7 crores in 2002-03.

Unfortunately, the revival witnessed in the industrial and manufacturing sectors has not extended to the Fast Moving Consumer Goods (FMCG) sector, which constitutes 85 per cent of your Companys sales. For the third year in succession, this sector has failed to live up to its name, and has witnessed sluggish to negative growth across most product categories.
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The operating profit margin ratio of PBDIT (less other income) to sales increased from 9.2 per cent in 2001-02 to 10.3 per cent in 2002-03. Interest outgo fell by 28.7 per cent, from Rs. 24.0 crores in 2001-02 to Rs.17.1 crores in 2002-03. Profit After Tax (PAT) grew by 32.1 per cent, from Rs. 64.4 crores in 2001-02 to Rs. 85.1 crores in 2002-03.

The dismal performance of the agriculture sector a key driver of rural demand has undoubtedly had an adverse impact on FMCG sales in the second half of 2002-03. In addition, the uncertainty about the implementation of the state Value Added Tax (VAT) resulted in primary sales suffering a setback in the last two months of 2002-03. Apart from these two factors, there are certain long-term economic and social trends at play, which need to be examined while discussing the sustained slowdown in the sector. The growth of per capita income in the country has slowed down from 6 per cent in 1994 to 3.4 per cent in 2002. In the same period, growth of Personal Disposable Income (PDI) has reduced much faster from 15 per cent to 5.3 per cent. Slowdown in the growth of PDI has resulted in sluggish off take of personal care and other FMCG products, as well as a growing trend towards down trading to cheaper and lower value brands, particularly in the necessity product categories.
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Return on Capital Employed (ROCE) grew from 14.5 per cent in 2001-02 to 19.7 per cent in 2002-03. Return On Net Worth (RONW) increased from 16.2 per cent in 2001-02 to 20.8 per cent in 2002-03

The test of a good company lies in its ability to produce superior results in tough times. A benchmarking exercise with 7 leading companies in the FMCG space (including Dabur), whose financial results are currently available, shows that Daburs sales and profits growth have outstripped average sales and profits growth of the sample for the year ended 31st March, 2003. As Chart B shows, as against the samples average sales growth of (-)2.4 per cent, we have grown by 5.9 per cent. Moreover, as against the average post-tax profit growth of (-)0.9 per cent, our post tax profit has grown by 32.1 per cent. As a matter of fact, Dabur ranks best in terms of profit growth.

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Dabur India Limited

Management Discussion and Analysis

Chart B : Dabur vis-a-vis a sample of 7 FMCG Companies, 2002-03 (% Growth)
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miscellaneous products. Till 2001-02, we had kept Ayurvedic specialities and miscellaneous products separate from our FMCG product portfolio. However, in view of the imminent de-merger of the FMCG and Pharmaceutical businesses, it has been decided to consolidate all the businesses that will remain in the FMCG company under one head. The business has grown by 4.8 per cent from

32.1

Dabur FMCG Industry

5.9

-2.4 Sales

-0.9 Profit After Tax

Rs.1,000.2 crores in 2001-02 to Rs.1,048.5 crores in 2002-03. The part of the business consisting of only Personal care and Health care products grew by 6.5 per cent in 2002-03 over 2001-02. Chart C gives a three-year comparison of FMCG sales.

Notwithstanding these milestones, we are conscious of the fact that we are competing in an extremely challenging environment. We have, therefore, taken several new initiatives in the year under review, which we believe will instil greater focus within the organisation, accelerate growth and create value for our shareholders. We would like to highlight three of them.
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Chart C : FMCG Sales (in Rs. Crores)

1200 1000 800 82.4 104.3 329.7 Personal Care Ayurvedic 68.6 77.1 336.7 Health Care Others 58.4 82.6 340.1

First, subject to approval from shareholders and appropriate authorities, we have decided to de-merge our Pharmaceutical business from Dabur India, and transfer it into a new company Dabur Pharma Limited. Consequently, Dabur India Limited will be a focused FMCG company.

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Second, we have re-engineered our FMCG business with a view to leverage synergies and scale, and to reduce costs.

PERSONAL CARE PRODUCTS This business accounted for 46.1 per cent of Daburs total sales, and 56 per cent of the Companys total FMCG sales in 2002-03. Notwithstanding sluggish market conditions, Daburs Personal care products sales grew by 9.6 per cent from Rs.517.8 crores in 2001-02 to Rs.567.5 crores in 2002-03. The Personal care products portfolio of the Company primarily consists of hair care, oral care products and skin care products, and honey. Chart D gives sales break-up of the personal care products portfolio. Shampoo Given the low incidence of using shampoo for hair washing in India, shampoos have considerable head room for growth although launch of new products at lower price points and sustained downtrading have slowed the value growth of this segment. Daburs Vatika range of shampoos, comprising of hair conditioning shampoo and an anti-dandruff shampoo, fared well during the year and were important growth drivers for

Third, we have recast our strategy for both FMCG and Pharma businesses. As part of the new strategy for the FMCG business we are streamlining our brand architecture with the objective of focusing on five major brands and enhancing their brand equity.

These and other strategic initiatives will be discussed at length in the course of this chapter. We will begin with a review of products and markets for these constitute the core of your Company.

MARKETS
A) FMCG

The FMCG business generated Rs.1,048.5 crores of sales, and accounted for 85 per cent of the total sales of your Company. During 2002-03, this business primarily consisted of Personal care products, Health care products, FMCG exports, Ayurvedic specialities, and some

Annu al Rep o r t 2002-03

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Management Discussion and Analysis

Chart D : Sales Composition of Personal Care Business
Hair Oil 50% 4% 7% 27% 12% Oral Care Honey Shampoo

toothpaste is based on the LDM platform, and is targeted at LDM users who want to upgrade to toothpaste, as well as lapsed LDM users who have migrated to toothpaste. Your Company is aware that the toothpaste market is highly competitive, and we will follow a calibrated and judicious strategy to secure a niche in this category. Honey

Others

Dabur Honey is the largest Indian brand in the organised sector. During 2002-03, this product witnessed a volume the Company. The combined growth of the Vatika range was 17.6 per cent. Overall, your Company was able to increase its market share in the hair shampoo segment, while keeping prices stable and margins intact. We plan to launch a new shampoo in 2003-04 and, going forward, we are confident of maintaining our high growth in this segment of the market. Hair oil The hair oil category witnessed a substantial increase in raw material prices during 2002-03. Given that Daburs prices in this category are higher than those of the competition, the input price hike could not be passed on to the consumer. Consequently, gross margins in this business came under severe pressure. Nevertheless, during the year under review, our leading brand in the hair oil category, Dabur Amla Hair Oil, witnessed a strong 7.8 per cent growth in sales. We have recently launched a new advertising campaign for this product. Notwithstanding the good performance of Dabur Amla Hair Oil, we are conscious of the fact that this segment as a whole is not growing fast enough. We plan to inject a growth momentum into this business through new product launches. Besides the launch of a new cooling hair oil, we propose to launch a hair oil for the mass market in 2003-04. Oral care Daburs Lal Dant Manjan (LDM) is the second largest brand in the toothpowder segment. While this product category as a whole witnessed a decline during 2002-03, our brand did well. We are planning a new advertising campaign for LDM in 2003-04, and we hope to grow sales and further increase our market share in this segment. In an important initiative in the oral care segment, your Company launched a new toothpaste during the year under review. This growth of 14.8 per cent, and a value growth of 21.4 per cent. However, there was more than a 50 per cent increase in the price of sourcing raw honey, which had an adverse impact on the margins of the product. Growth prospects While we are satisfied with our performance in the Personal care products business, we believe there is considerable potential for growth in this market. None of our products has market share in excess of 30 per cent in their categories. Indeed, with the exception of Dabur Amla Hair Oil, LDM and Dabur Honey, none has market shares of more than 10 per cent. Thus even in a scenario of low overall growth, we will strive to increase our market shares in all these segments. We will also attempt to drive the Companys growth in the Personal care products category through innovations and new product launches. In 2003-04, apart from the new shampoo and hair oil launches mentioned earlier, the Company plans to introduce Skin care products under the Vatika brand. Going forward, we foresee Hair care and Skin care categories to be major growth drivers for the Company, and we will roll out new initiatives to consolidate our presence in these markets. HEALTH CARE PRODUCTS The Health care products business of your Company grew by 1 per cent from Rs. 336.7 crores in 2001-02 to Rs. 340.1 crores in 2002-03, and accounted for 27.5 per cent of the Companys sales. Daburs product portfolio in this segment includes brands such as Dabur Chyawanprash, Hajmola and Pudin Hara, which are market leaders in their respective product categories. Chart E gives the sales break up of the Health care products portfolio. Sales in this business were subdued during the year as a result of failure of monsoon, as well as uncertainty regarding implementation of VAT in the last two months of the year.

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Dabur India Limited

Management Discussion and Analysis

Chart E : Sales Composition of Health Care Business
45% 3% 8% 14% 30% Health Supplements Digestives Baby Care Confectionary Others

While overall sales growth of the health care product portfolio remained subdued during 2002-03 as a result of sluggish market conditions, it is important to note that the overall net contribution from this business (inclusive of sales and marketing costs) increased by over 30 per cent. This was due to greater procurement efficiencies and better management of the Companys marketing spend. Growth prospects As the above discussion shows, some of the Companys low volume products fared well in 2002-03, and achieved

Health supplements In this category, Dabur Chyawanprash maintained its market share at 65 per cent, despite the launch of two new competing products. However, the Chyawanprash category, as a whole registered a negative growth during the year due to an extended summer, failure of the monsoons and a truncated winter. In line with the general trend in the industry, our product too experienced a sales decline. This decline was to a certain extent arrested by a strong showing in the second half of the year, when Dabur Chyawanprash posted a three per cent growth. Another health supplement, Glucose D fared well during the year, and was able to increase its market share from 9.4 per cent in 2001-02 to 11.6 per cent in 2002-03. Driven by its first ever-advertising campaign, this product registered a 32 per cent sales growth during the year. Digestives and Confectionary Hajmola sales witnessed a marginal decline of less than 1 per cent, even as its market share remained stable at 79 per cent. Sale of the Pudin Hara group of products increased by 6 per cent, with Pudin Hara liquid growing by 26 per cent as a result of enhanced above-the-line advertising activity. In the confectionary segment, Hajmola candy witnessed a negative sales growth as a result of new competing launches and increased competition in the segment. Baby oil Dabur produces the largest baby oil in the country Lal Tail which recorded an 18 per cent sales growth. Baby Olive Oil, which was launched in 2001-02, too, fared well during the year under review, and finished its first full year with a market share of 1.4 per cent. We plan to further consolidate our position in this segment.

sales as well as market share growth during the year. However, the sales of some of our major brands, such as Dabur Chyawanprash, Pudin Hara, and Hajmola, did not register significant increases. Some may argue that these brands are market leaders in mature product categories and, as such, it is inevitable to see slackening growth. We at Dabur do not agree with this contention. We are of the view that there is still considerable potential to grow these product categories, and we will strive to increase our sales as well as market shares in them. We are revamping the communication mix of Dabur Chyawanprash, and a new, contemporary, packaging will be launched in 2003-04. New variants of Pudin Hara, and Hajmola, too, will be launched in 2003-04. Our outlook for the Health care product portfolio is positive. Apart from growing our existing brands, brand extensions, and introduction of new products are in the pipeline. We are also looking at expanding our health supplements portfolio, and propose to develop the OverThe-Counter (OTC) Health care business in a significant manner. New OTC products will be launched during 2003-04, and we expect this business to be a key growth driver. KEY INITIATIVES Before concluding our discussion on the Personal care and Health care businesses, we would like to highlight two key initiatives taken by your Company during 2002-03. As shareholders are aware, brands are the lifeline of an FMCG company, and Dabur is fortunate to have developed brands, which have strong equity with consumers. To leverage this brand equity, and to align our brands with our growth objectives, we are going to streamline our brand architecture. We have decided to focus on five key brands :

Annu al Rep o r t 2002-03

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Management Discussion and Analysis

Dabur, Vatika, Hajmola, Anmol and Real. Fresh investments will be made in further strengthening their brand equity, and the advertising strategy of your Company will concentrate on these brands. FMCG EXPORTS Exports of Dabur increased by 60.7 per cent from Rs.15 crores in 2001-02 to Rs.24.1 crores in 2002-03. These figures do not include the reorganised Middle East exports, which has been transferred to a franchisee. In the year under review, exports to Russia picked up with introduction of more products and expansion in distribution network. Dabur Boro Glow was successfully introduced and, in another initiative, new products under the brand name of Dr. Burman were introduced through multi-level marketing channels. Dabur plans to launch other products under its own brand name in Russia. In UK and other European markets, Vegecaps were introduced in the nature care range Vatika and Anmol will be our flagship brands for the Personal care products portfolio, and most of the diversification into new product categories, such as skin care, will be spearheaded by them. While Vatika will be positioned as a premium brand, Anmol will be positioned as a mass market, value for money brand. Hajmola will be positioned as a digestives and confectionary brand, while Real will be the umbrella brand for juices and food, aimed at upmarket urban consumers. Dabur will be the mother brand of the Company. Given the salience and the recall value of the Dabur brand name, it will be spread across the FMCG space, with particular emphasis on Health care products. The second key initiative taken in 2002-03 was the decision to re-organise our FMCG business to leverage synergies and scale, and to reduce costs. Consequently, the two erstwhile Strategic Business Units (SBUs) of the Company the Family Products Division (Personal care products) and the Health Care Products Division have now been merged into one SBU. Personal care products and Health care products have significant overlap in terms of distribution and retail networks, and these will now be distributed through a common arrangement. This will result in synergies and cost savings. Moreover, the integration will assist in better management of finished goods inventory, and give a boost to the Companys effort to focus on secondary sales. We are confident that these initiatives, along with the slew of new product launches and aggressive product extensions, will inject a growth impulse into Dabur. AYURVEDIC SPECIALITIES The Ayurvedic specialities range of products of Dabur used for the treatment of common as well as serious ailments can be categorised into Asavs, classicals and branded ethical products. This business saw a growth of 7.1 per cent from Rs.77.1 crores in 2001-02 to Rs.82.6 crores in 2002-03. of products. Hair oils, Shampoos and Hajmola were exported to Afghanistan. Initiatives were also taken to market the Companys products in Australia, New Zealand and West Indies. The Company also made significant progress towards entering the lucrative North American markets. Distributors have been appointed, and marketing of products to the ethnic Indian segment have begun. In another important development, Dabur is entering into a joint venture with a local partner to manufacture and market our products in Bangladesh. Dabur will hold a majority stake in this joint venture, and we expect Bangladesh to become an important market for our products. In 2003-04, the Company plans to continue with its focus on Russia and CIS countries along with Afghanistan, West Indies and the Asia-Pacific region. Efforts will also be made to make further in-roads into neighbouring countries, and explore new markets. Dabur has identified exports as a major thrust area for the future. An international business division has been set up within the Company to promote exports, and we expect this business to grow steadily in the coming years.

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Dabur India Limited

Management Discussion and Analysis

While Asavs and classical product categories have reached maturity stage, branded ethical products have a greater opportunity of growth. Therefore, the Company has been focusing on the last category by increasing the product range and by introducing these in newer delivery systems. New product launches are backed by clinical trials. To promote its Ayurvedic specialities, Dabur has followed the strategy of active interaction with the Ayurvedic community doctors, BAMS (Bachelor of Ayurvedic Medical Sciences), and vaids who prescribe these products. Factory visits have been organised for these professionals to make them aware of our high standards of processing and manufacturing, as well as our commitment to quality. DABUR FOODS LIMITED (DFL) Dabur Foods Limited is a 100 per cent subsidiary of Dabur India Limited, and is engaged in the marketing of natural fruit juices and ethnic cooking pastes. The Companys brand portfolio includes Real, Hommade, Lemoneez and Capsico, of which Real and Hommade have been identified as the growth drivers of the Company. In 2002-03, Dabur Foods recorded sales growth of 29.8 per cent to Rs.69.2 crores. B) PHARMACEUTICALS

The Pharmaceuticals business of your Company grew by 12.8 per cent from Rs.162.9 crores in 2001-02 to Rs.183.8 crores in 2002-03. Dabur has a strong presence throughout the entire Pharmaceutical spectrum ranging from cutting edge original research to manufacturing of Active Pharmaceutical Ingredients (APIs) and formulations, to sales and distribution. As shareholders may be aware, we have taken a strategic decision to concentrate on the Oncology (anti-cancer) business, and we are the market leader in this segment in India, with a more than 20 per cent market share. We have also established a significant presence abroad, and are currently present in over 25 overseas markets. In the domestic market, our branded formulations business grew by 11.1 per cent in 2002-03. During the year under review, your Company launched three new Oncology products in the domestic market :
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Thalix, Indias first thalidomide brand, was introduced in October 2002. Thalidomide has extensive clinical efficacy in multiple myeloma (a kind of blood malignancy) and leprosy. With its introduction at an affordable price, this launch has been able to bridge the need gap which existed in the management of this disease. An extensive patient education programme has been introduced to help the physicians and patients in safe handling of the drug. Thalix is available as 50 mg and 100 mg capsules. Oxitan, an oxaliplatin brand, has been indicated for treatment of coloroctal cancer. Unlike other oxaliplatin brands, Oxitan offers the unique advantage of being available as a ready to use solution, thus avoiding complications related to reconstitution. Oxitan is available as 50 mg and 100 mg vials injection. Trozet (letrozole) is indicated for the treatment of hormone responsive breast cancer, and offers significant advantages over conventional treatment in terms of efficacy and survival. This introduction will further strengthen our presence in the breast cancer therapeutic segment. Trozet is available as a 2.5 mg tablet.

During the year under review, two new products were introduced in the Hommade range tomato puree and coconut milk. In the Real range, two new flavours Litchi and Guava were launched, taking the total variants to eight. Sales of Real grew by 25 per cent between 2001-02 and 2002-03. In addition to retail consumers, the marketing and sales initiatives of the Company were directed at boosting institutional sales to hotels, restaurants and caterers. In 2003-04, the Company plans to sharpen its marketing strategy and modify its packaging to align it with the tastes like eating a fruit concept that it intends to project for the Real brand.
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In addition to new domestic product launches during 2002-03, Dabur expanded its overseas presence by making a foray into the generic markets of Mexico, Vietnam and Myanmar. We have emerged as the largest generic paclitaxel seller in Philippines, Thailand, and Malaysia.

Annu al Rep o r t 2002-03

21

Management Discussion and Analysis

In July 2002, with the objective of making the Pharmaceutical business of the Company more focused and efficient, all the operations and functions of the Pharmaceutical division were separated from the FMCG operations of the Company. The entire Pharmaceutical division was relocated in one office premises, and a dedicated team was created to manage support functions such as operations, purchase, finance, quality assurance, and supply chain. Subsequent to this virtual de-merger, the Board of Directors of your Company decided to de-merge the Pharmaceutical business from Dabur India and transfer it into a new company, Dabur Pharma Ltd. with effect from 1st April, 2003, subject to approval from shareholders and appropriate authorities. The advantages and implications of the de-merger have been discussed in detail later in this chapter. In our last year Annual Report, we had stated that we were in the process of formulating a well-integrated growth strategy for the Pharmaceutical business, and had appointed Accenture to assist us in this strategy formulation. Our longterm growth strategy was finalised during 2002-03, and contains three key components.
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will make its first Abbreviated New Drug Applications (ANDA) filings in the US. Para 4 filings, which give the first to market advantage in the US generics market, will also form a part of our US growth strategy. The formulation manufacturing facility of our UK-based wholly owned subsidiary, Dabur Oncology Plc, is approved by MCA, UK. We intend to apply for US FDA approval both for our UK plant, as well as the API manufacturing facility at Kalyani, West Bengal. In addition to the US, we also have aggressive growth plans for the European market. As Dabur Pharma grows in the overseas generics market, we will use the export earnings, along with domestic profits, to invest in original research. Our initiatives in the research and development field have been discussed in detail later in this chapter.

OPERATIONS
MANUFACTURING Dabur has six manufacturing facilities at Sahibabad (Uttar Pradesh), Baddi (Himachal Pradesh), Alwar (Rajasthan), Katni (Madhya Pradesh), Kalyani and Narendrapur (West Bengal). The APIs and formulations of the Company are manufactured in-house at Kalyani, Sahibabad and Baddi. Fifty per cent of FMCG products, comprising the Health care products and Ayurvedic specialities portfolio, are manufactured in-house, while the Personal care products portfolio, which accounts for the remaining 50 per cent, are out-sourced to eight contract manufacturers. Your Company is in the process of setting up a manufacturing facility at Jammu, for manufacturing Personal care products. Jammu has been selected as the new site in order to avail fiscal benefits offered for setting up manufacturing facilities in that location. This plant will be commissioned in 2003-04.

First, we will become a major player in the global Oncology generics business. Second, in the field of original research, we will focus on developing New Chemical Entities (NCEs) and New Drug Delivery Systems (NDDS) in the Oncology therapeutic segment. Third, we will grow our domestic branded generics business without committing huge investments into it.

At present, exports account for around 36 per cent of the Company s Pharmaceuticals sales, and the new Pharmaceutical company will aggressively pursue opportunities both in highly regulated as well as less regulated markets. We believe that there will be a $12 to $15 billion opportunity in the global generic Oncology market from 2005 to 2012, and we are getting poised to be a recognised player in this space. Dabur has obtained marketing approvals for Oncology products in many key export markets of Asia, CIS, Central and South America, and Africa. Over the next few years, we will increase our global footprint and set up marketing networks throughout the world. The US market constitutes the ultimate destination for all Pharmaceutical companies. During 2003-04, Dabur Pharma

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Dabur India Limited

Management Discussion and Analysis

Your Company has been giving considerable emphasis on improving manufacturing and operational efficiencies. During the year under review, we focused on enhancing productivity of capital and existing assets, improving plant efficiencies in the existing manufacturing facilities and following more stringent quality control and supervision norms at outsourcing locations. Standardisation of processes, tight budget controls and energy audits constitute some of the other initiatives undertaken by the Company to improve its operational performance. As a result of these measures, operating profit margin (excluding other income) of the Company has improved from 9.2 per cent in 2001-02 to 10.3 per cent in 2002-03. Chart F shows the continuous improvement of the Companys productivity (defined as value of sales per worker), from 1998-99 to 2002-03. Productivity increased by almost 18 per cent, from Rs.28 lacs per worker in 2001-02 to Rs.33 lacs per worker in 2002-03, mainly due to better shop floor practices, lower breakdowns and improved efficiency in energy use. Wastage on the shop floor has reduced by more than 20 per cent in 2002-03 over 2001-02.
Chart F : Sales Turnover per employee (Rs. Lacs) 33
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SUPPLY CHAIN MANAGEMENT Efficient supply chain management is critical to Dabur, which markets over 600 SKUs. The supply chain integrates a wide range of functions encompassing production scheduling to materials planning and procurement to primary distribution. Information Technology (IT) has played a major role in strengthening the supply chain management by improving operational efficiencies in procurement, production and delivery systems. With the implementation of Baan and Mfg Pro, supply chain management has benefited from stable and more efficient production planning on the basis of accurate secondary sales and stock data. Efficient supply chain management has enhanced the flexibility of operations; lowered operation cycles and finished goods inventories; reduced delivery costs, while improving customer-servicing levels. In addition to meeting tight budgetary controls, these improvements have resulted in substantial reduction in costs due to freeing up of extra working capital. Dabur has over 500 vendors through which they source their raw materials. During 2002-03, the Company followed a strategy of rationalising its vendor base. The Company also appointed Freemarkets, a leading e-procurement company, to assist the Company in implementing its e-sourcing initiatives. During the year, the Company conducted successful reverse auctions for two raw materials saffron and jadi-booti as well as for fixing freight rates. These initiatives resulted in a saving of around 7 per cent to 8 per cent on current prices of these raw materials. The Company plans to procure more products through the reverse auction route. This will help rationalise and upgrade the vendor base of the Company, while at the same time result in substantial

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In 2002-03, Total Quality Management (TQM) techniques were implemented on a pilot basis at two plants in the area of statistical process control. The results have been encouraging, and have resulted in lower rejection of raw materials, time savings, and made the procurement process more efficient. The Company plans to implement TQM for other functional areas in the future. In addition, Total Production Maintenance (TPM) measures will be initiated in two locations in 2003-04, and we plan to make TPM an integral part of the production processes of your Company. This initiative is aimed at improving the productive efficiency of capital assets.

savings and greater transparency in the procurement process.

RESEARCH AND DEVELOPMENT

PHARMACEUTICALS Discovery research in the area of Oncology forms an important component of the growth strategy of Daburs Pharmaceutical business. The Dabur Research Foundation (DRF) has made significant progress on the research front and is active in developing new therapeutic options in Oncology including New Chemical Entities (NCEs), vaccines, and herbal extracts.

Annu al Rep o r t 2002-03

23

Management Discussion and Analysis

At present, three of DRFs New Chemical Entities (NCEs) are at the clinical trials stage. Phase I clinical trials for DRF7295 have been successfully completed, and the protocol for Phase II clinical trial for submission to Drug Controller General of India (DCGI) is under preparation. This molecule is expected to be useful for the treatment of GI Cancers more specifically for colon, pancreatic and gall bladder where there is an un-met need. Phase I trials of Daburs second molecule, TNP , a polymeric nanoparticle delivery of Paclitaxel, initiated in the first quarter of 2003, are scheduled to be completed in the fourth quarter of 2003. It is a cremophor free water-soluble preparation and is expected to have a better safety profile. The third molecule, which is an oral anti-cancer product, is in early Phase 1 clinical trial stage. In addition to these molecules, which are at the clinical trial stage, our research pipeline comprises 10 other anti-cancer molecules, which are undergoing late pre-clinical trials. An additional 36 molecules are at different stages of discovery, and early pre-clinical trials. To date, DRF has applied for 46 Pharmaceutical patents in India, PCT countries, and US and has received approval for 21 patents. The total number of patent applications filed by DRF is 150, out of which 90 patents have been granted so far. As part of its research initiatives, DRF has developed strengths in drug discovery technologies, including the design of Novel Analogs of bioactive peptides and organic molecules. It has also built capabilities in the design, cloning and expression of synthetic genes, as well as in Nanoparticle based drug delivery technology. Novel Drug Delivery Systems (NDDS) for anti-cancer drugs are also being developed, with special emphasis on nano-particles, and microspheres. DRF is also active in the area of cancer diagnosis, and has set up a Mutation Analysis Laboratory. By the third quarter of 2003 Dabur will be in a position to offer sophisticated gene mutational analysis for determining genetic predisposition to breast and colon cancer. Your Company has followed a strategy of working closely with CSIR laboratories, government deparments, universities, and scientific institutions on the research front. The network of scientific collaborations has been further strengthened and continues to be a resource to the discovery component of the R&D. INFORMATION TECHNOLOGY Dabur has been focusing on leveraging Information Technology (IT) to achieve higher levels of efficiency. The Company had implemented two ERP systems Baan
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FMCG Conscious of its responsibility, Dabur is committed to the well being of the environment in its quest for new and improved products. Following are the major initiatives taken by Dabur in the area of FMCG research and development :
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R&D plays an important role in new product development. The new toothpaste launched in 2002-03, was the outcome of Daburs in-house R&D. New product launches scheduled in 2003-04, too, are taking place with active collaboration of R&D. Following a government ban on the use of barks and roots of certain trees, your Company has substituted these raw materials with twigs and leaves, after adequate R&D in collaboration with All India Institute of Medical Sciences (AIIMS). The Company has stopped using banned plant species, and is engaged in the pursuit of developing appropriate alternatives. These efforts are being carried out in active collaboration with Department of Indian System of Medicine (ISM) and Benaras Hindu University (BHU). The agro-biotechnology division of the Dabur Research is working on the development of modern and result oriented techniques for the cultivation of medicinal plants. Further work under the Plant for Life project continued, where rare and endangered plants were produced and distributed for contract cultivation to various farming and tribal communities. The Company established two in-house facilities for developing nurseries and transplanting saplings in Hyderabad and Nepal.

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Dabur India Limited

Management Discussion and Analysis

and Mfg Pro in production and distribution respectively. Use of Mfg Pro gives real-time information about the inventory and sales situation of distributors and improves the accuracy of demand forecasts. These demand forecasts are then fed into the back-end system (Baan) for materials planning and production scheduling. Integration of the two systems is expected to significantly enhance their efficiency in 2003-04. Mfg Pro is fully operational in the zonal offices, motherwarehouses and CFAs and Baan is already live in five manufacturing locations. A Secondary Sales System is also being implemented to provide countrywide information on Secondary pipelines and sales by brand. This new Secondary Sales System, by making focus on secondary sales possible, has played an important role in tracking brand-wise sales, and reducing pipeline inventories. The improvement in area-wise and brand-wise inventory management has scaled up the entire supply chain management through better sales forecasts, production scheduling, materials planning, vendor management and raw material sourcing. A new initiative of Reverse auctioning through Freemarkets has been introduced. Vendor management and raw material sourcing benefited from the reverse auctioning initiative of the Company, undertaken for saffron, Jadi Booti, and for fixing freight rates. This will be extended to other products in the future. In the year under review, your Company has implemented yet another new intiative of Claims Settlement using an Intranet/ Extranet based system, for systematic tracking and settlement of claims. This will result in greater efficiency in managing receivables, and speed up the process of recovery of claims. During the year, the Company also implemented another major initiative, Employee Management System (EMS), an intranet based HR-information system, including Payroll and PF processing. This system enables employees of the Company to access details regarding their payroll and other HR related information using the corporate Intranet. In 2003-04, the Company plans to implement IT solution for PF Trust Accounting, which will make management of Employees Provident Fund more efficient. In addition, to strengthen the supply chain further, the Company will initiate a process of linking its important suppliers to the Company.
G G G G

This will allow the suppliers to have instant information about the inventory levels of finished goods and production pipeline of the Company and is expected to improve their procurement process and delivery of raw materials. Daburs IT initiatives have earned it a place in the Top Ten Technology Managers in the country by an independent body under the auspices of Network Computing magazine, as listed in the April 2003 issue. HUMAN RESOURCES A Company is as good as its people, and we are privileged to have an excellent pool of human resources working with us. We are committed to attract, retain and reward high quality employees with a focus on talent management. During the year under review, the Company took the following HR initiatives :
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Function-wise and unit-wise evaluation of optimal manpower requirement in light of increased integration of information technology initiatives such as implementation of Mfg Pro, Baan and e-procurement, and the challenges they present for the future. Comprehensive training and development modules have been developed and delivered by the company for all levels for sales and marketing employees. Employees from other functions have been regularly provided functional training. Entered into arrangement with Financial Institutions to outsource non-core HR activities of sanctioning and administering various loans to employees at a competitive rate. Implementation of Employee Management System (EMS), a comprehensive HRIS package, which also makes available to each employee personal data and other services. This increases the productive time of the employees. Streamlining of HR policies and processes to reduce administrative time.

On the industrial relations front, relations with workers remained cordial, and not a single man day of work was lost due to industrial action of any kind. Moreover, a long-term wage settlement agreement was signed with the workers union of Narendrapur plant, which puts an end to age-old practices, which had hindered fair employment opportunity.

Annu al Rep o r t 2002-03

25

Management Discussion and Analysis

FINANCIALS
Despite a general slowdown in the consumer goods sector and a drought affected sluggish rural economy, your Company has registered a 5.9 per cent growth in sales from operations during 2002-03 over 2001-02. Sales growth has been accompanied by sustained improvements in operational efficiencies, resulting in a 18.5 per cent growth in operating profit (PBDIT less other income) in 2002-03 over 2001-02. Reduction in interest rates, coupled with a 48.4 per cent decrease in total debt has contributed to a 28.7 per cent decline in financial expenses from Rs.24 crores in 2001-02 to Rs.17.1 crores in 2002-03. Sales growth, enhanced operational efficiencies and reduced financial expenses have translated into a 32.1 per cent growth in post tax profits (PAT) in 2003-04 over 2001-02. Table 1 summarises Daburs financial performance for 2002-03. Table 1 : Daburs abridged profit and loss statement for 2002-03 (in Rs. Crores) 2002-03 Sales from operation Other income Total income Total expenditure Interest Depreciation PBDIT PBIT PBT Current tax Deferred tax PAT 1232.3 8.3 1240.6 1105.9 17.1 22.0 134.7 112.6 95.5 7.4 3.0 85.1 2001-02 1163.2 13.9 1177.1 1056.6 24.0 21.0 120.5 99.5 75.5 5.5 5.6 64.4 PBDIT*/Sales** PBIT/Sales** PBT/Total income PAT/Total income ROCE RONW Note : * ** Sales from operations.
G G

a percentage of sales decreased from 13.3 per cent in 2001-02 to 13 per cent in 2002-03. Expenditure on commissions, discounts and rebates came down by 7 per cent from Rs. 27 crores in 2001-02 to Rs. 25 crores in 2002-03. Pre tax profit margin (PBT/Total income) grew from 6.5 per cent in 2001-02 to 7.7 per cent in 2002-03, while post tax profit margin (PAT/Total income) increased from 5.5 per cent in 2001-02 to 6.9 per cent in 2002-03. Return On Capital Employed (ROCE) grew from 14.5 per cent in 2001-02 to 19.7 per cent in 2002-03, and Return On Net Worth (RONW) grew from 16.2 per cent in 2001-02 to 20.8 per cent in 2002-03. Table 2 compares key financial ratios of your Company in 2002-03 as against 2001-02. Table 2 : Key financial ratios 2002-03 10.3% 9.1% 7.7% 6.9% 19.7% 20.8% does not include other income. 2001-02 9.2% 8.6% 6.5% 5.5% 14.5% 16.2%

Improvements in ROCE and RONW are testimony to the Companys continuous efforts to effectively utilise its assets. In order to increase the efficiency of its assets, the Company has rationalised unproductive capital. Consequently, total capital employed came down by 15.1 per cent from Rs.613.5 crores in 2001-02 to Rs.521.1 crores in 2002-03. On the liability side, secured loans decreased by 41.6 per cent from Rs.49.7 crores in 2001-02 to Rs.29.0 crores in 2002-03 and unsecured loans reduced by 50 per cent from Rs.163.4 crores in 2001-02 to Rs.81.0 crores in 2002-03. This has also reduced risks associated with financial leveraging. Debt equity ratio has come down from 0.5 in 2001-02 to 0.3 in 2002-03, while interest coverage (PBIT/ Interest), a measure of the Companys ability to pay interests through its profits, has increased from 4.1 in 2001-02 to 6.6 in 2002-03.

There are a few salient features of our financial performance, which we would like to highlight.
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Improvement in operating margins (PBDIT less other income to Sales ratio) from 9.2 per cent in 2001-02 to 10.3 per cent in 2002-03 has been achieved primarily by better procurement and use of raw materials. Material cost as a ratio to sales has come down from 44.3 per cent in 2001-02 to 42.3 per cent in 2002-03, even as there were price increases on certain inputs.

Expenditure on advertising and publicity has increased by 4 per cent from Rs.154.5 crores in 2001-02 to Rs.160 crores in 2002-03. However advertising expenditure as

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Dabur India Limited

Management Discussion and Analysis

On the assets side, the Company has voluntarily adhered to Accounting Standard 28, resulting in impairment of fixed assets of Rs.30.9 crores (net of deferred tax of Rs.18 crores). The Company also witnessed a decrease in net current assets by 25.7 per cent from Rs.260.9 crores in 2001-02 to Rs.193.9 crores in 2002-03, implying an improvement in net working capital. Net working capital cycle improved from 82 days of sales in 2001-02 to 57 days of sales in 2002-03 with debtor cycle decreasing from 38 days of sales in 2001-02 to 35 days of sales in 2002-03. However, inventory turnover increased from 50 days of sales in 2001-02 to 53 days of sales in 2002-03. Inventory turnover during the year have been affected by reduction in primary sales in the last quarter of 2002-03, due to uncertainty regarding VAT implementation. The reduction in primary sales resulted in curtailed production. Consequently, raw materials inventory increased from Rs.33.9 crores as on 31st March, 2002 to Rs.50.8 crores as on 31st March, 2003. Finished goods inventory actually declined from Rs.90.7 crores as on 31st March, 2002 to Rs. 81.7 crores as on 31st March, 2003. Reduced working capital, sales growth and higher operating margins have translated into improved free cash flow. Free cash flow is defined here as cash inflow from operations less cash outflow from investing activities. Chart G plots the free cash flow of the Company for the last four years. Table 3 : Segment-wise results (Rs. Crores) 2002-03 FMCG Sales PAT Capital Employed Pharma Sales PAT Capital Employed CONSOLIDATED RESULTS Daburs consolidated results include the performance of Dabur India Limited, Dabur Nepal (P) Limited, Dabur Foods Limited, Dabur Egypt Limited, Dabur Overseas Limited and Dabur Finance Limited. The consolidated results exclude the UK based subsidiary, Dabur Oncology Plc, which will be spun off with the pharma business pursuant to the demerger. This is in accordance with AS 21 para 11, which specifies that any investment held for the purpose of disposal or transfer may not be consolidated. Table 4 gives consolidated results. Table 4 : Consolidated results (Rs. Crores) 2002-03 Net Sales from operation Other income Total income Total expenditure Interest Depreciation PBT (before minority interest) Current tax Deferred tax PAT (after minority interest) 1370.9 7.2 1378.1 1216.3 26.1 29.3 106.4 10.3 3.0 91.1 2001-02 1280.9 11.9 1292.8 1148.6 33.3 28.7 82.3 6.8 6.9 66.4 2001-02

1048.5 71.9 306.6 183.8 13.1 214.5

1000.3 52.5 425.0 162.9 11.9 188.5

Chart G : Free Cash Flow (Rs. Crores)

100 80 68.1 60 48.7 40 20 0 32.3 97.9

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

1999-00 2000-01 2001-02 2002-03

Your Company follows a strong internal audit and control programme. Price Waterhouse is the internal auditor for the entire Company and its subsidiaries. The internal auditors

SEGMENT-WISE RESULTS The Companys business is divided into two segments; namely FMCG and Pharmaceuticals. The FMCG business comprises Personal care products, Health care Products, Ayurvedic specialities and others. The Pharmaceuticals business consists of Allopathic, Oncology formulations and bulk drugs. Table 3 gives segment-wise results.

independently evaluate adequacy of internal controls and concurrently audit the majority of the transactions in value terms. The Company has an independent Internal Audit function staffed with qualified and experienced people. Independence of the audit and compliance function is ensured by the direct reporting of the internal audit division to the Audit Committee of the Board.

Annu al Rep o r t 2002-03

27

Management Discussion and Analysis

DE-MERGER
The Board of Directors of your Company decided to de-merge the Pharmaceutical business (including assets) and transfer it to a new company. The de-merger is subject to approval from shareholders and appropriate authorities. The proposed de-merger constitutes a significant restructuring initiative and will provide greater focus and independence to our two main businesses. The FMCG business, which will remain within Dabur India, will concentrate on its core competencies in personal care, Health care and Ayurvedic specialities. The new Pharmaceutical company, Dabur Pharma Limited, will focus on its expertise in allopathic, Oncology formulations and bulk drugs. We believe that the de-merger will represent a win-win situation for both the Companies, and create greater value for our shareholders. Both these companies will have dedicated management teams, with the freedom and resources to pursue their independent growth strategies. Moreover, their organizational cultures and performances will mirror the peculiar characteristics of their respective industries, and their performance indicators will be in sync with those of their industries. For the proposed Pharmaceutical company, the de-merger will give it the opportunity to enter into marketing and research alliances with international Pharmaceutical majors. The FMCG company, on the other hand, will gain from greater flexibility and dynamism in its operations, concentrated utilisation of internal accruals and better asset utilisation. It is proposed that the new Pharmaceutical company will be publicly listed in the stock exchanges. The share holding pattern of this new company will be the same as that of Dabur India, and it has been decided that all shareholders of Dabur India will be issued one additional share of Dabur Pharma for every two shares held of Dabur India. The Dabur brand name, which is a property of Dabur India Limited, will be licensed to the Pharmaceutical company and all patents, trademarks and brands pertaining to the Pharmaceutical business will be transferred to the new Pharmaceutical company. Apart from specific liabilities, general liabilities in proportion to assets transferred will form a part of the new companys source of funds. concern for us. When product categories decelerate as they have done in the FMCG sector in the last few years, competition becomes intense, and both margins as well as sales realizations come under pressure. During 2002-03, growth in the FMCG sector was adversely impacted by drought, and to a lesser extent by uncertainty regarding implementation of VAT in the last two months of 2002-03. While we would not like to speculate about the monsoons, it appears that confusion regarding VAT is likely to persist in 2003-04. The threat of counterfeit and spurious products constitutes another risk factor. As the market leader in the Ayurveda and herbal products market, Dabur is concerned that counterfeit and spurious products, besides directly impacting our sales, could damage the credibility of the entire industry. The raw materials for many of our finished products come from plants and herbs. The rapid deforestation in the country has resulted in an erosion of our raw material base. This constitutes yet another risk factor.

OUTLOOK AND OPPORTUNITY

Notwithstanding the risks and concerns outlined above, Dabur is cautiously upbeat about its prospects in 2003-04. The proposed de-merger will create two focused and independent companies, whose combined growth rates should outstrip the growth of the present Dabur India. The Pharmaceutical companys growth should be driven by exports, and new product launches, reorganisation of the FMCG business units, and continued thrust on operational efficiencies should assist sales as well as profit growth of the FMCG company.

CAUTIONARY STATEMENT
Statements in this management discussion and analysis describing the Companys objectives, projections, estimates and expectations may be forward looking statements within the meaning of applicable laws and regulations. Actual results might differ substantially or materially from those expressed or implied. Important developments that could affect the Companys operations include a downtrend in the domestic FMCG industry, rise in input costs, and significant changes in political and economic environment in India, environment standards, tax laws, litigation and labour relations.

THREATS, RISKS AND CONCERN

The slowdown in GDP growth in general, and the sluggish growth of the FMCG sector in particular is a matter of

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Dabur India Limited