Dabur India: Cautious outlook

Despite satisfactory performance in the December quarter, analysts are wary about lower advertising spends

Dabur India’s consolidated sales growth of 16.9 per cent to Rs 1,087 crore was in line with market expectations. Though the company reported stable operating profit margins of 19.9 per cent (up 40 basis points) despite an increase in input costs, the performance in the December quarter highlights key concerns which could impact future performance.

Volume growth at 10 per cent was the lowest in the past 11 quarters. The haircare category, the single-largest revenue driver that contributes 27 per cent to overall sales, witnessed marginal revenue growth of 3.8 per cent due to a 30 per cent decline in the shampoo segment. However, Dabur expects shampoo volumes to bounce back due to revamped product portfolio.

Oral care (17 per cent of sales) also posted disappointing growth of 9.4 per cent. However, categories like foods, skincare and homecare, which collectively contribute 27 per cent to revenues, reported robust growth. Analysts are cautious about competition in oral care and shampoo segments.

International business (about 20 per cent of overall revenues) reported strong growth of 14 per cent (19 per cent on the same currency basis), with healthy operating profit margins of over 25 per cent. But, analysts are worried about the company’s increasing dependence on international growth. Recent acquisitions, including that of Namaste Laboratories, are also likely to fetch significant gains for company in 2011-12.

Dabur’s ability to hold on to margins for the past several quarters, even in a rising input cost scenario, has been commendable. But, a drop in advertising expenses to sales (down 118 basis points year-on-year to 13.6 per cent between April and December 2010) is a concern. This, coupled with absence of new product launches, can cost the company market share and lead to a decline in volume growth. Analysts advise monitoring of lower ad spends amid rising competition.

The movement in overall margins is also a key monitorable amid rising input costs, though Dabur is relatively better placed compared to peers due to its diversified input cost basket. An increase in input costs could also lead to downtrading by consumers, threatening volume growth as well as margins.