Add Dabur India - Input costs continue to trouble - BRICS

Dabur's results were in line—revenue was up 23% yoy at Rs13.7bn(our est. Rs13.2bn), operating profit increased 3.3% to Rs2.2bn (est.Rs2.3bn), and APAT was up 16% at Rs1.7bn (est. Rs1.7bn). While higher A&P spends helped drive +10% volume growth, coupled with higher input costs, they put pressure on margins, indicating limited pricing power. We have cut our FY13 EPS estimate by 1.6% to Rs4.3and introduced FY14 estimates at Rs5. We maintain our Add rating and revise our target to Rs115 (from Rs103).

Revenue growth impressive in international and domestic business:

Dabur's 23% jump in revenues was driven by a 19% yoy increase in its domestic business to Rs9.8bn (vs. our estimate of Rs9.9bn) and a 34% jump in international business (including Hobi and Namaste). Operating margins fell 310bps yoy (came in at 16.3% vs. estimated 17.2%) due to acombined impact of a 310bps yoy rise in input costs and a 180bps yoy increase in A&P spends. However, a 90bps drop in other expenses and similar drop in employee expenses partially limited the fall.

Segment EBIT performance indicates limited pricing power:

Consumer care business sales grew 20% at Rs11.4bn but EBIT rose 7.5% to Rs2.6bn. The foods business sales were up 28% at Rs1.6bn and EBIT was up 29% at Rs302mn. Other business sales jumped 102% to Rs500mn but EBIT declined 30% and its retail business sales jumped to Rs123mn but EBIT loss expanded to Rs29mn (vs. Rs23mn yoy). Though it maintained its margins in food business, its consumer care and other business margins fell 260bps and 560bps respectively. We attribute this to Dabur's limited pricing power in the competition-prone categories.

Price hikes still not enough to tackle higher input costs:

Despite price hikes since Q2, Dabur was unable to cover the full increase in input costs. We attribute this to its No. 2 and No. 3 positioning in most categories and presence in highly competitive categories. Consequently, gross margins contracted 310bps yoy in Q4.

Higher A&P spends catalysed volume growth, but restricted margin expansion:

Dabur continues to have high A&P spends to gather volume growth momentum. In Q4,its A&P spend increased by 180bps to 13% (similar to Q3). Though this has restricted the margins expansion, it helped the company achieve +10% volume growth. We believe Dabur's A&P spends will continue to remain high and drive volumes.

Introducing FY14 EPS of Rs5, cutting FY13 estimates by 1.6%:

We are marginally revising our FY13 estimates to factor-in lower pricing power and increase in inputcosts. We have cut our FY13 EPS by 1.6% to Rs4.3 and have introduced FY14 estimates at Rs5.

Maintain Add, revise target to Rs115:

We are rolling over valuations to FY14 earnings to arrive at a price target of Rs115 (Rs103 earlier) by valuing Dabur at 23x (discount toLT average of 24x). Current stock price factors-in most of the negatives related to competition and lower pricing power.

Source : Equity Bulls

Keywords