>DABUR (MACQUARIE RESEARCH)

Strong growth but a pretty penny

Event
■ We met with the management of Dabur. Management reconfirmed our core thesis. While longer-term prospects remain strong, we believe that after the recent rally, valuations fully reflect potential earnings upgrades.

Impact
■ Hair care remains strong: Renewed focus has driven exciting growth (~30%) in shampoos in FY09. Continued focus and launches of new variants leads management to believe that 25–30% growth in FY10E can be achieved.

■ Emerging focus on skin care: We expect Dabur to position its recently acquired brand ‘Fem’ at the mid-market and continue with ‘Gulabari’ at the mass end. We also expect skin care launches with an herbal positioning at the higher end from Dabur’s stable. Management believes this category is scalable, with potential to drive overall margins higher.

■ Volumes to drive growth: Given cost deflation in some inputs and packaging material linked to crude, management expects muted price growth of 2–3% for FY10E. The bulk of the top-line growth is expected from volumes. Continued buoyancy in rural markets will aid 12–15% overall volume growth, in our view.

■ Retail business update: Management has adjusted the strategy of its retail venture from ‘aggressive expansion’ to a healthier store addition rate of 10–12 stores per annum. Average store size is likely to come down to 1,000 sqf. Management believes that this is a viable business in the medium term. It expects losses to remain limited to around Rs100–120m for FY10E.

Earnings and target price revision
■ Minor changes to earnings estimates: We are raising our estimates from FY10E onward by 1–2% to account for slightly higher than expected top-line growth in oral care and hair care. We also are raising our target price to Rs105 from Rs100 to account for the change in earnings estimates and aminor change in our WACC assumption.

Price catalyst
■ 12-month price target: Rs105.00 based on a DCF methodology.

■ Catalyst: Quarterly results; trends in sales volumes and pricing.

Action and recommendation
■ Maintain Neutral: We remain bullish on Dabur’s longer-term prospects given its consistent track record of delivering 16–18% earnings growth with margin expansion in the last six years. We believe that multiple growth drivers will help Dabur remain one of the fastest-growing FMCG players in India. However, the recent rally and the lack of near-term triggers lead us to believe that the stock is expensive. Balance sheet (net cash) remains strong.

■ For investors who wish to remain defensive after the recent rally in the broader market, we prefer ITC (ITC IN, Rs195, OP, TP: Rs220, upside: 12.8%) and Marico (MRCO IN, Rs74, OP, TP: Rs93, upside: 25.7%) amongst consumer staples.

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