Dabur shares underperform FMCG index by 22%

Consumer goods firm Dabur India Ltd’s shares have underperformed the BSE FMCG index by 22% in the past one year. But that’s a small price for investors to pay, considering the stock had outperformed the index by a whopping 200% between April 2003 and October 2007. Even after the recent underperformance, Dabur’s returns since April 2003 stand at 468%, compared with a rise of 142% in the FMCG index.

At its peak earlier this year, Dabur shares were trading at nearly 35 times past earnings, and a correction was well overdue—what with earnings expected to grow at less than half that rate this year.

In the second quarter of the current fiscal, operating profit has increased by a mere 8.7%. Although Dabur’s valuations have already corrected to 16.6 times past earnings, the current level of earnings growth is a cause for concern.

It also needs to be noted that this year’s earnings have been hit by the company’s recent venture into the retail space, with its NewU chain of health and beauty stores.

Adjusted for the losses in the retail business, operating profit rose by 11.9%. Still, this is a substantial drop compared with the growth of 17.1% reported for the June quarter. Higher advertising expenses, thanks to new product launches, were the culprit. Operating contribution of the non-retail businesses, or profit before advertising expenses, rose by 17.1%, nearly in line with the growth in the June quarter.

One of the worries analysts had about the company was that volume growth at 10-11% in the June quarter was lower than the industry average of 14-15%. Last quarter’s revenue growth of 18.3%, coupled with analyst estimates that price increases added 5-6% to revenues, suggests that volume growth hasn’t improved much.

What’s heartening is that the consumer care division, which lagged in growth in the first quarter, has done better in the September quarter. However, the foods business fared much worse, reporting a revenue growth of just 6.6%, compared with 15.4% in the June quarter. Dabur has been facing supply constraints at its foods plant in Nepal for some time now, and the fact that sales of this division have still not picked up is a negative.

Thankfully for Dabur’s investors, the company management has decided to go slow on expanding its retail business until lease rentals correct in the country.

This will curb losses of the division substantially, but even with the current level of losses, the company-wide earnings growth numbers get toned down quite a bit. In a bearish market, investors may not be willing to digest these losses well.

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