Dabur India Ltd’s March quarter performance was affected by a combination of events. The end result disappointed investors. Its share price fell by about 2% on Wednesday, as sales rose by about 31% from the year-ago period, but net profit rose by just 8.5%.
Acquisitions played an important role in its sales growth. It completed two acquisitions in the second half of fiscal 2012 (FY12)—Turkey’s Hobi Group and Namaste Laboratories Llc. More than half of its sales growth in the March quarter was attributable to acquisitions, one-third to volume growth and the rest to price increases.
Dabur split its business for investors into domestic business—further split into consumer care and consumer health—and international business.
Consumer care is its largest business, contributing about 68% to overall sales; it grew by 15.4% during the quarter. In hair care, its largest segment, sales of hair grooming oils grew on the back of higher volumes and prices, but that of shampoos continued to decline. The company has revamped its shampoo portfolio and cut prices to stay competitive, which affected its performance in FY11.
Stiff competition and Hindustan Unilever Ltd’s efforts to regain volume growth and market share have affected Dabur. But other sub-segments in consumer care have done well in the March quarter.
Its consumer health division, which contributes about 8% to sales, repeated its December quarter sales growth of about 14%.
Dabur’s international business contributed about 22% to overall sales. Its organic growth (excluding the impact of acquisitions) was 9.5% in the March quarter and 13% in constant currency terms.
The company’s sales were affected by the political unrest in North Africa and the Middle East, which are a few of its key markets. Though the continued disturbances in the region will affect its performance, acquisitions will cushion international business growth in FY12 for another three quarters.
Dabur’s sales rose by 31%, but its material costs rose by only 27%. This gap, which might otherwise have been a reason for celebration, is due to Namaste Laboratories’ way of accounting for manufacturing costs. It outsources its manufacturing and this cost is reflected in other expenditure. Dabur’s other expenditure rose by 75% in the March quarter.
As a result, overall expenditure growth provides a better picture. It has risen by 31.5%, reflecting higher input costs. Operating profit margins have fallen by a little under a percentage point. Namaste Laboratories’ margins are lower than Dabur’s average, putting pressure on overall margins. Plus, input cost inflation continues to be a worry, especially as competition makes it difficult to pass on cost increases.
This quarter, investors will also be concerned by an increase in its working capital requirement, which Dabur attributes to acquisitions, strategic stocking (for impending product launches) and higher advance tax.
In FY12, sales growth will continue to be robust, chiefly reflecting the impact of acquisitions. But investors will be more interested in Dabur’s ability to sustain FY11’s volume growth of 13%, regain pricing power, improve Namaste Laboratories’ profitability and better working capital management. On the external front, normalcy in the Middle East and lower inflation will be key triggers.
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