DSIJ Mindshare

Stock Pick From The FMCG Sector

Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as Choice Scrip for this issue is a leading FMCG company with a growing turnover from many brands with instant recall value in the Indian market and abroad.

The FMCG sector has been a favourite with investors as it is less susceptibility to the uncertain market environment. What aids the sector is the nature of the business, where the demand for consumer products remains strong. Among the many companies in this sector, Dabur India seems to be well placed and is likely to create wealth for investors going ahead.

What supports our conviction in the company is its wide product portfolio spread across categories, a strong brand recall, the presence in domestic and international markets and the fact that the stock is available at a fair valuation as compared to that of its peers. Further, other FMCG stocks like Emami and Marico are up by almost 39 per cent and 21 per cent in CY2012 against Dabur, which has appreciated by just six per cent, and there could be good room for an up-move in this stock.

Dabur India is a 125 year-old company with a strong presence across segments like hair care, oral care, health supplements, digestives, foods, etc. Within these categories, it has a strong brand recall with brands like Dabur Honey, Dabur Chyawanprash, Hajmola, Dabur Amla Hair Oil, Vatika, Activ and Real Juice. The company’s turnover had touched the Rs 1000 crore mark in the year 2000. In the last 12 years, this has grown more than five-fold, with revenues for FY12 at around Rs 5200 crore. Of the total revenue, 70 per cent comes from the domestic market, while the remaining 30 per cent comes from the international markets.

On the financial front too, Dabur India looks good as it recently posted a decent performance for the March 2012 quarter. The sales increased by 23 per cent to Rs 1363 crore, while the net profit increased by 16 per cent to Rs 170 crore on a YoY basis. The company had a mixed set of volumes and price growth, with volume growth at around 12.4 per cent, while the rest came from price. The volume growth was the best as compared to the company’s previous three quarters, which saw growth at around 8.6 per cent, 5 per cent and 10.8 per cent. One of the reasons for this could be its strategy of not passing on the full price hike to the consumers, which boosted the demand for the products. This move further resulted in a decline in the company’s margins.

In the March quarter of FY12, the EBIDTA margin increased by four per cent to Rs 243 crore but the margins fell by 330 basis points to 17.8 per cent on a YoY basis. This was majorly due to the raw material costs, which increased by 23 per cent, and also on account of advertising and publicity expenses, which increased by 43 per cent. The FMCG industry itself is affected by rising input costs, and Dabur has not been an exception to this. On the other hand, advertising expenses create a brand and product awareness, which we believe, will be beneficial for the company going ahead. For the full year 2011-12 too, the company has put up a good performance as on a consolidated basis. The sales increased by 30 per cent to Rs 5283 crore, while the net profit increased by 13 per cent to Rs 644 crore.

On the valuations front, Dabur India is available at a Price to Earnings multiple of 29x, which is considered fair compared to that of its peers like Emami trading at a P/E of 28x, HUL at 33x and Marico at 34x. We believe that Dabur India has a good brand portfolio, and this, coupled with strong growth and increasing rural demand, will help the company to grow ahead. Hence, the stock looks like a good investment option.

BEST OF LAST ONE YEAR
Company NameReco. (Rs) CMP (Rs)Gain%
Ajanta Pharma 342.00 553.00 61.70
Havells India  386.60 529.00 36.83
Asian Paints  2985.00 3766.00 26.16
Nestle India 3746.85 4619.00 23.28
HSIL 133.00 162.00 21.80
Colgate Palmolive (India) 1014.00 1226.00 20.91
FAG Bearings India  1261.00 1504.00 19.27
Torrent Pharmaceuitical 559.00 638.00 14.13

SHAREHOLDING PATTERN AS ON 31/03/2012
Promoters 68.7
Banks Fin. Inst. and Insurance 5.37
FIIs 18.42
Private Corporate Bodies 0.67
Others 6.84
Grand Total 100

LAST FIVE QUARTERS (Rs/Cr)
Mar-12Dec-11Sep-11Jun-11Mar-11
Net Sales 1,363.58 1,452.68 1,262.33 1,204.58 1,115.62
Raw Materials 614.02 560.05 585.63 519.09 501.33
Other Expenses 185.71 387.24 169.88 315.41 215.66
Tax 37.72 33.69 42.71 32.25 41.4
Net Profit 170.52 172.82 173.86 127.74 147.01
Equity Share Capital 174.21 174.21 174.2 174.07 174.07

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