Stock review - Dabur India

Dabur India has been able to post a double digit topline as well as bottomline growth in tough environment, leveraging its age old Ayurveda platform. Also, its unique herbal platform coupled with the franchise value that the brand enjoys mitigates the risk of fierce competition from other FMCG players.
Core brands enjoy strong recall value: Dabur's portfolio of products remains relatively insulated from the ongoing price wars in the FMCG space, providing it with a sustainable competitive advantage. All its core brands, viz. Dabur, Vatika, Anmol, Real and Hajmola enjoy tremendous recall value for consumers, and provide with a platform to leverage on going forward.
Demerger of Pharma business unlocks value: Demerger of Dabur Pharma has unlocked value, with one of the biggest positives being Dabur India's working capital turned negative for the first time ever. De-merger brings to fore the core FMCG business of Dabur, which is its inherent strength. We expect the RoE to improve to 39.2% in FY05 as against 31% for FY04.
E-sourcing initiatives to enhance margins: While geographical expansion and new product initiatives to take care of topline growth for the next few years, e-sourcing initiatives coupled with higher in-house production would help enhance margins going forward. For FY04, Dabur procured 50% of its raw materials requirement through e-sourcing. We expect higher e-sourcing and in-house production to enhance EBITDA margins by 170 bps for FY05.
Healthy balance sheet to fund acquisitions: With cash & cash equivalents at Rs 115 cr, the company has built a war chest for meaningful acquisitions. We believe that there could be interesting opportunities in the herbal space, and acquisitions could open up new avenues for growth and lead to higher than expected topline growth.
Investments in excise free zones lead to tax savings: The company has earmarked a capex of Rs 50 cr for FY05 most of them being in excise free zones, which would help tax savings, providing a fillip to the bottomline. 80% of products would be manufactured in-house by FY05, which would help reduce dependence on vendors and enhance margins.
Valuations look attractive when adjusted for growthWe expect the company to grow sales at 10% CAGR and net profit to grow at 23.1% for the next two years. At the CMP of Rs 73, the stock trades at 17.2x FY05E earnings and 12.9x EV/EBITDA. Valuations on a growth adjusted basis look attractive. We recommend a buy with a target price of Rs 91, based on 17.5x FY06E earnings, at which it would trade at par with the FMCG leaders. Higher visibility of growth and predictability of earnings stream would lead to further re-rating on the stock. Sluggish pick-up in rural economy and pricing pressure in Ayurveda genre are key risks to our target.