BUY

Dabur India (DABUR)

Consumer products APRIL 29, 2010
RESULT
Coverage view: Attractive

Going strong. Dabur reported in-line 4QFY10 results, ahead of street estimates. Price (Rs): 180
Continuing robust volume growth of ~13% was the highlight—all categories Target price (Rs): 200
performed well except hair oil and skin care (flat growth). We reiterate our BUY rating
BSE-30: 17,380
as Dabur (1) is entering a period of multi-year predictable growth in mix-accretive
categories like skincare, shampoo and foods (2) it is the only pure-play listed personal
care company with a meaningful presence in various personal care categories.

Company data and valuation summary

Dabur India
Stock data Forecasts/Valuations 2010 2011E 2012E
52-week range (Rs) (high,low) 183-102 EPS (Rs) 5.8 6.8 8.2
Market Cap. (Rs bn) 156.2 EPS growth (%) 28.1 17.6 20.8
QUICK NUMBERS
Shareholding pattern (%) P/E (X) 31.1 26.5 21.9
Promoters 69.1 Sales (Rs bn) 33.7 40.1 47.5 • Sales growth of
FIIs 13.4 Net profits (Rs bn) 5.0 5.9 7.1 16% primarily led
MFs 2.4 EBITDA (Rs bn) 6.7 8.3 9.8 by volumes
Price performance (%) 1M 3M 12M EV/EBITDA (X) 23.1 18.5 15.3
Absolute 12.6 12.2 73.9 ROE (%) 54.3 51.1 50.7 • Fem Care
Rel. to BSE-30 14.8 5.6 14.1 Div. Yield (%) 1.7 2.0 2.4
contributed 3% to
the overall sales
Robust quarter growth
Dabur reported consolidated net sales of Rs8.5 bn, (+16%, KIE estimate Rs8.5 bn), EBITDA of • Margin expansion
Rs1.6 bn (+25%, KIE estimate Rs1.6 bn) and PAT of Rs1.3 bn (+26%, KIE estimate Rs1.2 bn).
on account of lower
Sales growth of 16% was led by volume growth of ~13%, pricing growth of 1% while translation raw material cost
loss was ~1%. Additionally, integration of Fem Care contributed ~3% to the sales growth. The
Consumer Care Division (CCD) which forms about 75% of the company’s sales mix grew at 15%
during the quarter and the foods business which forms about 12% of the sales mix grew at 24%.
EBITDA margin expanded 137bps on the back of 150bps savings in material cost as the company
benefited from favorable raw material hedging. Other income was up 59% on base effect (-35%)
as cash reserves were low in 4QFY09 due to the Fem Care acquisition.

Highlights of the quarter–flat growth in hair oil and skin care; remaining categories grow well

` The hair oil business, which contributes ~17% of sales saw flat growth during the quarter.
However, Dabur Amla, the flagship brand of the company, grew at ~5%. Dabur is a market
leader in the Amla hair oil space with ~70% market share. In 4QFY10, Marico cut price of its
Shanti Badam Amla hair oil which competes with Dabur Amla. We believe that while Shanti
Badam could potentially gain some incremental market shares, we do not expect any significant
impact on Dabur Amla given the limited scale and size of Shanti Badam (~Rs700 mn sales, ~3%
of Marico’s sales). Dabur, on its part, has made an entry into the coconut hair oil and light hair
oil space with its brands Vatika and Amla Flower Magic but has not yet wrought a meaningful
presence in these segments. We highlight that Parachute dominates the coconut hair oil space
while Bajaj Almond dominates the light hair oil market.

` Shampoo business grew at ~10%—primarily led by volumes. During the quarter, the company Manoj Menon
manoj.menon@kotak.com
reduced the price of Vatka Anti Dandruff sachet to Re1 from Rs1.5 which led to a surge in Mumbai: +91-22-6634-1391
volumes (good performance considering that the anti-dandruff segment is seeing muted
growth). Vatka Anti Dandruff shampoo forms ~10% of Dabur’s shampoo sales. Amrita Basu
amrita.basu@kotak.com
Mumbai: +91-22-6634-1147

Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-6634-1100

For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.
Consumer products Dabur India

` Toothpaste portfolio of the company grew at a robust 17% while toothpowder sales
declined 5% during the quarter. Flagship brand in the oral care business, Babool grew at
~17%.

We like the company’s efforts to leverage the strength of its Babool brand and extend it
to the gel segment. In 2HCY09, the company had launched ‘Babool Mint fresh gel’ priced
at Rs27 for 145 gms (same price point of Cibaca and Babool white toothpaste). We are
bullish about the success of this brand. HUL’s CloseUp has ~75% market share in the gel
segment with Colgate gel accounting for the rest.

Entry into the gel segment by Dabur may lead to consumer shifts from the low-end
toothpaste segment (dominated by Colgate Cibaca) to Babool gel. We believe consumer
shifts to Babool gel from Babool white toothpaste will benefit Dabur as gels typically have
higher gross margins and it will increase consumer stickiness (as there is no meaningful
competition for Babool gel at the <Rs30 price point). Babool Mint gel is presently being
test marketed in North and East India.

` The health supplements portfolio of the company reported sales growth of ~44% driven
primarily by its glucose brand (Glucose-D, aided by 33% extra grammage free offer). We
believe that Chyawanprash sales growth was also likely in high double digits due to an
extended winter.

` Foods portfolio grew at ~20% during the quarter. The company’s “no added sugar”
campaign on Activ boosted the brand during 4QFY10. Real Bursst, the company’s fruit
drink offering is presently being test marketed and is slated for national launch this fiscal.

` Skin care sales during the quarter were flat. The company is targeting a national launch of
Uveda, its premium skin care offering, in this fiscal. We are cautious on the success of this
brand, given Dabur’s limited experience in launching premium brands. We expect
adspends on this brand to be ~20% of sales and estimate sales of ~Rs500 mn in FY2012E.

` The International Business Division (IBD) reported sales growth of 19% during the quarter
on constant currency terms. Contribution of IBD has been increasing steadily in Dabur’s
overall sales mix (~18% in FY2010 against14% in FY2007) which is a significant positive
as this business has higher margins.

` Consumer Healthcare Division (CHD) grew at ~13% during the quarter. Sales growth was
contributed equally by the OTC and Ethical portfolio. Key brands such as Dashmularishta,
Shilajit and Pudin Hara grew at a robust 19%, 27% and 18% during FY2010.

` Fem Care sales reported sales of Rs266 mn with 1% sales growth. EBITDA margin
improved significantly to 28% from 12% due to savings in material cost (-16%) and
lower employee cost (-52%) and other expenditure (-33%). Savings in these cost items
were channelized to fund higher brand investments (+66%).

` During the quarter, the company set up a manufacturing facility at Baddi which includes
lines for manufacturing hair oils , skin care and ayurvedic products.

2 KOTAK INSTITUTIONAL EQUITIES RESEARCH

 Dabur India Consumer products

Interim consolidated results of DIL, March fiscal year-ends (Rs mn)

(% chg)
4QFY10 4QFY10E 4QFY09 3QFY10 4QFY10E 4QFY09 3QFY10
Net sales 8,488 8,506 7,317 9,262 (0) 16 (8)
Total expenditure 6,868 6,955 6,021 7,489 (1) 14 (8)
Material cost 3,843 3,912 3,423 4,204 (2) 12 (9)
Staff cost 754 754 592 731 0 27 3
Advertising and sales promotion 1,156 1,156 963 1,349 0 20 (14)
Other expenditure 1,115 1,134 1,044 1,204 (2) 7 (7)
EBITDA 1,620 1,551 1,296 1,773 4 25 (9)
OPM (%) 19.1 18.2 17.7 19.1
Other income 143 140 89 59 2 59 140
Interest 25 58 83 37 (58) (70) (34)
Depreciation 149 196 144 146 (24) 4 2
Pretax profits 1,589 1,436 1,158 1,650 11 37 (4)
Tax 258 252 106 271 2 145 (5)
Net income 1,331 1,184 1,053 1,378 12 26 (3)
Extraordinary items - - - -
Reported PAT 1,331 1,184 1,053 1,378 12 26 (3)
Income tax rate (%) 16.2 17.6 9.1 16.4

Cost as a % of sales
Material cost 45.3 46.0 46.8 45.4
Staff cost 8.9 8.9 8.1 7.9
Advertising and sales promotion 13.6 13.6 13.2 14.6
Other expenditure 13.1 13.3 14.3 13.0

Segment results of DIL

Revenue
Consumer care 6,395 5,568 7,455 15 (14)
Consumer health 768 677 714 13 8
Foods 1,156 929 866 24 33
Retail 24 18 28 37 (15)
Others 209 179 262 17 (20)
PBIT
Consumer care 1,864 1,473 2,025 26 (8)
Consumer health 211 229 179 (8) 18
Foods 201 173 150 16 34
Retail (22) (21) (23) 4 (5)
Others 0 1 28 (83) (99)
Capital employed
Consumer care 7,001 5,031 6,817 39 3
Consumer health 689 630 673 9 2
Foods 1,689 1,164 1,415 45 19
Retail 125 169 133 (26) (6)
Others 256 284 317 (10) (19)

Source: Company

KOTAK INSTITUTIONAL EQUITIES RESEARCH 3

Consumer products Dabur India

Interim standalone results of DIL, March fiscal year-ends (Rs mn)

(% chg)
4QFY10 4QFY09 3QFY10 4QFY09 3QFY10
Net sales 7,013 6,219 7,705 13 (9)
Total expenditure 5,717 5,098 6,214 12 (8)
Material cost 3,474 3,017 3,650 15 (5)
Staff cost 547 432 517 26 6
Advertising and sales promotion 881 836 1,075 5 (18)
Other expenditure 817 813 972 0 (16)
EBITDA 1,296 1,121 1,491 16 (13)
OPM (%) 18.5 18.0 19.3
Other income 107 76 52 41 107
Interest 21 52 15 (59) 46
Depreciation 97 85 92 13 5
Pretax profits 1,285 1,060 1,436 21 (11)
Tax 213 93 244 129 (12)
Net income 1,072 967 1,192 11 (10)
Extraordinary items - - -
Reported PAT 1,072 967 1,192 11 (10)
Income tax rate (%) 16.6 8.8 17.0

Cost as a % of sales
Material cost 49.5 48.5 47.4 118 54
Staff cost 7.8 6.9 6.7 207 (64)
Advertising and sales promotion 12.6 13.4 14.0 42 202
Other expenditure 11.6 13.1 12.6 4 178

Segment results of DIL

Revenue
Consumer care - 4,607 6,021 (100) (100)
Consumer health - 677 714
Foods - 764 793
Retail - 170 -
Others - - 177 #DIV/0! (100)
PBIT
Consumer care - 1,326 1,732 (100) (100)
Consumer health - 204 179
Foods - 131 153
Retail - - -
Others - 0 2 (100) (100)
Capital employed
Consumer care - 3,345 4,018 (100) (100)
Consumer health - 630 673 (100) (100)
Foods - 884 1,089 (100) (100)
Retail - - - #DIV/0! #DIV/0!
Others - 330 317 (100) (100)

Source: Company

4 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Dabur India Consumer products

Reiterate BUY

We reiterate our BUY rating on the stock with TP of Rs200 based on September-2011E EPS.
At our target price, the stock would trade at 25X Sep-2011E P/E for earnings CAGR of 20%
over FY2010-12E. Our EPS estimates are broadly maintained at Rs6.8 and Rs8.2 for FY2011E
and FY2012E, respectively.

We continue to believe that Dabur deserves a premium to its historical multiple (and sector
multiple) as (1) the company is entering a period of multi-year predictable growth in key
categories of skincare, shampoo and foods and (2) it is the only pure-play listed personal
care company with meaningful presence in various personal care categories. Further, we
forecast underlying mix improvement in its sales, EBITDA and moderate operating leverage.

Key risks to our rating are (1) limited pricing power, which makes Dabur vulnerable to input
cost inflation, (2) heavy dependence on North India (35% of sales).

Dabur : PE bands and stock price (Rs)

`
250
30X

200 Stock price

20X
150
15X

100 10X

50

-
Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10

Source: Bloomberg, Kotak Institutional Equities

KOTAK INSTITUTIONAL EQUITIES RESEARCH 5

 Consumer products Dabur India

Profit model, balance sheet, cash model of Dabur India, March fiscal year-ends, 2007-2012E

2007 2008 2009 2010E 2011E 2012E

Profit model
Net revenues 20,431 23,611 28,054 33,657 40,120 47,471
EBITDA 3,432 4,037 4,661 6,330 7,722 9,091
Other income 255 339 468 387 533 698
Interest (expense)/income (150) (167) (232) (132) (199) (132)
Depreciation (343) (364) (449) (557) (682) (751)
Pretax profits 3,195 3,844 4,448 6,028 7,374 8,907
Tax (373) (507) (540) (1,005) (1,470) (1,775)
Net income 2,822 3,338 3,908 5,024 5,905 7,132
Earnings per share (Rs) 3.3 3.9 4.5 5.8 6.8 8.2

Balance sheet
Total shareholder's equity 4,597 6,036 8,102 10,407 12,689 15,444
Total borrowings 1,599 992 2,276 1,868 968 668
Deferred tax liability 245 33 70 79 79 79
Minority interest 45 48 46 46 46 46
Total liabilities and equity 6,486 7,108 10,493 12,401 13,782 16,237
Net fixed assets 3,792 4,653 5,592 6,829 7,347 7,597
Investments 807 2,037 3,470 3,563 3,563 3,563
Cash 607 766 1,484 2,976 4,521 7,184
Net current assets 1,280 (347) (53) (967) (1,648) (2,107)
Total assets 6,486 7,108 10,493 12,401 13,782 16,237

Free cash flow

Operating cash flow, excl. working capital 2,131 4,826 4,723 5,506 7,619 7,662
Working capital changes (787) 221 (929) (1,051) (591) (804)
Capital expenditure (495) (1,225) (1,289) (1,500) (1,200) (1,000)
Free cash flow 849 3,822 2,505 2,955 5,828 5,857

Key assumptions
Revenue growth 9.5 15.6 18.8 20.0 19.2 18.3
EBITDA margin 16.8 17.1 16.6 18.8 19.2 19.2
EPS growth 24.6 17.6 17.0 28.1 17.6 20.8

Source: Kotak Institutional Equities estimates

6 KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures

"I, Manoj Menon, hereby certify that all of the views expressed in this report accurately reflect my personal views about the
subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional Equities,
70% within the specified category.

60%
Percentage of companies within each category for which Kotak
Institutional Equities and or its affiliates has provided investment
50%
banking services within the previous 12 months.

40% * The above categories are defined as follows: Buy = We expect

33.6% this stock to outperform the BSE Sensex by 10% over the next 12
29.5%
30% months; Add = We expect this stock to outperform the BSE
23.5% Sensex by 0-10% over the next 12 months; Reduce = We expect
this stock to underperform the BSE Sensex by 0-10% over the
20%
13.4% next 12 months; Sell = We expect this stock to underperform the
BSE Sensex by more then 10% over the next 12 months. These
10% 6.7% ratings are used illustratively to comply with applicable
2.7% 2.0% regulations. As of 31/03/2010 Kotak Institutional Equities
0.7%
0% Investment Research had investment ratings on 149 equity
securities.
BUY ADD REDUCE SELL

Source: Kotak Institutional Equities As of March 31, 2010

Ratings and other definitions/identifiers

Definitions of ratings

BUY. We expect this stock to outperform the BSE Sensex by 10% over the next 12 months.

ADD. We expect this stock to outperform the BSE Sensex by 0-10% over the next 12 months.

REDUCE. We expect this stock to underperform the BSE Sensex by 0-10% over the next 12 months.

SELL. We expect this stock to underperform the BSE Sensex by more than 10% over the next 12 months.

Our target price are also on 12-month horizon basis.

Other definitions

Coverage view. The coverage view represents each analyst’s overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers

NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable
regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic
transaction involving this company and in certain other circumstances.

CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.

NC = Not Covered. Kotak Securities does not cover this company.

RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.

NA = Not Available or Not Applicable. The information is not available for display or is not applicable.

NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH 7

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