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| Dabur India: Small can be beautiful |
| Akash Joshi / Mumbai Jul 23, 2010, 00:35 IST |
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 The plan to acquire a West Asian cosmetics company is in line with the company’s strategy.
The news of an acquisition usually leads to a fall in the share price of the acquirer and a rise in the price of the targeted company’s stock.
The reason: The acquirer company may see a change in its fundamental financial structure, which may affect valuations. However, the case of Dabur India has been different. Its share price rose 1.33 per cent on reports that it is was planning to acquire Turkish personal products company Hobi Kozmetic.
Analysts say the reason is that the acquisition is a relatively smaller one and the outflow will not be financially disruptive for the company. Hobi Kozmetic has footprint in around 30 countries and a presence in hairstyling, haircare, skincare, bath and shower products under brand names Hobby and New Era. Analysts have estimated the company’s revenues at around Rs 130 crore in FY10, just about four per cent of Dabur’s sales.
This small-sized company will give Dabur a presence in West Asia and North Africa. But, the most critical factor will be the valuation. Recent acquisitions made in the region in a similar category have been valued around two times the sales. With sales of Hobi estimated around Rs 130 crore, the acquisition cost may be around Rs 260 crore, say analysts, adding the company is expected to fund this through debt.
While its debt-to-equity ratio is estimated around 5.2 times, the fructifying of these operations will change it substantially in the current financial year. The debt for the acquisition would only be around 20 per cent of shareholders’ funds and so the impact on the debt-to-equity ratio will not be substantial. The net debt is just about 0.1 times its earnings before interest, tax, depreciation and amortisation, estimate analysts at HSBC. They also estimate that with a net profit margin of around 15 per cent, the acquisition of Hobi will be earnings accretive to the extent of one-two per cent. The risk, however, will be a valuation of more than three times the sales.
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