Dabur India - Ad-spend pushes EBITDA margins down; Hold - Anand Rathi

Dabur reported 20.6% yoy revenue growth, led by price hikes and ~10% translation gains. Except oral care, most segments did well. Higher adspend resulted in EBITDA margin dropping 137bps. We expect the company to continue to invest behind its brands. This would continue to cap any margin expansion. We retain a Hold, with a target of Rs.130.

- Price hikes, translation gains drive growth. Dabur reported 20.6% yoy revenue growth. Of that, price hikes and translation gains accounted for ~10 percentage points; volume growth, 10.5 percentage points.

- Performance segment-wise. The company reported a strong, 15.7%, revenue growth in health supplements: digestives: 11.9%, OTC and ethicals: 22.6%, hair care: 13.2%, home care: 23%, skin care: 24.8% and juices: 18.1%. The international business grew 24.8% yoy. Oral care, however, continued to disappoint, with just 7% revenue growth.

- Higher ad-spend drags margin down. The ad-spend-to-sales perecentage (of net sales) has increased 175bps and has resulted in a 137-bp drop in the EBITDA margin. EBIT has grown just 10.5% but other income was up 45% yoy. The effective income tax rate was down 115bps yoy. Net profit was up 16.4% yoy on the small base of 2QFY12's net profit, which was up just 8.4% over 2QFY11 net profit.

- Outlook. We believe that the international business might suffer a bit due to the rupee appreciation but the fall in raw material prices would help drive margins up. However, the company would need to increase adspend (as percent of net sales) to support its brands.

- Valuation. We value the stock at Rs.130, at a target PE of 25x FY14e earnings. In the last 10 years, it has traded at an average PE of 21x. We expect improving return ratios would result in maintaining such premium valuations. Risk. Higher raw material prices.

Source : Equity Bulls

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