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Asia Pacific Equity Research

29 November 2011

Dabur India Limited

Management meeting: Margin challenges to sustain near term
Margin concerns to sustain near term. RM inflationary pressures continue with rupee depreciation further aggravating the situation, resulting in continued gross margin contraction (though on a sequential basis quantum of contraction should reduce due to price increases). Mgmt noted that they have cUS$70-75mn of RM exposure directly or indirectly impacted by currency. Further domestic A&P spends are likely to move up significantly in 2H sequentially (1HFY12 at 9.6% of sales) owing to new launches and focus to push up volume growth rates. Medium term mid teens revenue growth rate likely for domestic business. Management noted that while volume growth rates may moderate owing to higher base effect over medium term (from double digit to single digit), they believe pricing growth will help sustain overall revenue growth rates at mid- teens in the domestic market. Focus categories include healthcare, foods and personal care. Mgmt stated that they would prefer to operate in niche areas in highly competitive categories like shampoos and mainstream skin care. They are looking to step up innovation and introduce new products across their focus segments. Rural distribution to be key driver of growth ahead. Dabur's new initiative to deepen its direct rural reach has witnessed successful response in few states where it has been introduced so far. In Uttar Pradesh, it has resulted in the number of sub-stockists increasing from 1600 to 4300. Company is now looking to roll out this initiative on a national basis and is hopeful that this would help widen its portfolio reach and provide better returns versus the wholesale channel. Category wise comments. 1) Skin care: Fem and Gulabari will be the focus brands. Will look to introduce mid premium brand Uveda on a wider scale towards end of next year, 2) Juices: likely to sustain 20%+ growth rates supported by introduction of new variants and expanding distribution in semiurban regions, 3) Oral care: Difficult to take up pricing given reluctance of market leader for price hikes. Will continue to focus on its herbal positioning here, 4) Shampoos: Price competition continues from MNCs; prefer niche positioning in urban markets while being mainstream in rural pockets, 5) Home Care: focus segments include air freshners and insect repellents. Africa is key pillar of overseas expansion strategy with significant focus on localising production of Namaste products there. While margins in Sub-Saharan Africa are lower than margins in GCC/MENA countries, mgmt is hopeful of gradually scaling up Africa margins as scale gains. Dabur is looking to expand its presence in Africa and is open for M&A opportunities. FDI in Retail. Mgmt noted that this will help grow modern trade share (at 8% of sales), however working capital cycle will be longer in case of modern trade.
Dabur India Limited (Reuters: DABU.BO, Bloomberg: DABUR IN) Rs in mn, year-end Mar FY09A FY10A FY11A Revenue (Rs mn) 28,053 33,914 40,775 Net Profit (Rs mn) 3,911.0 5,012.9 5,686.2 EPS (Rs) 2.25 2.88 3.25 Revenue growth (%) 18.8% 20.9% 20.2% EPS growth (%) 17.1% 28.0% 12.9% ROE 54.5% 57.2% 48.9% P/E (x) 42.7 33.4 29.6 EV/EBITDA (x) 34.3 26.4 23.2 Dividend Yield 0.9% 1.2% 1.2%
Source: Company data, Bloomberg, J.P. Morgan estimates.

Neutral
DABU.BO, DABUR IN Price: Rs96.05 Price Target: Rs110.00

India Consumer, Retail, Media Latika Chopra, CFA

AC

(91-22) 6157-3584 latika.chopra@jpmorgan.com J.P. Morgan India Private Limited

Ritesh Gupta
(91-22) 6157 3585 ritesh.z.gupta@jpmorgan.com J.P. Morgan India Private Limited

Regional Consumer Ebru Sener Kurumlu

(852) 2800-8521 ebru.sener@jpmorgan.com J.P. Morgan Securities (Asia Pacific) Limited
Price Performance
110 Rs 90 70
Nov-10 Feb-11 May-11 Aug-11 Nov-11

DABU.BO share price (Rs) NIFTY (rebased)

Abs Rel

YTD -4.2% 16.7%

1m -4.5% 5.0%

3m -11.1% -13.3%

12m 3.7% 20.5%

FY12E 51,102 6,528.5 3.73 25.3% 14.8% 41.9% 25.7 19.5 1.6%

FY13E 58,448 7,834.8 4.48 14.4% 20.0% 40.5% 21.4 16.6 1.8%

Company Data Shares O/S (mn) GPS_AUTO_153_4 Market cap ($ mn) Price (Rs) Date Of Price 3mth Avg daily volume 3M - Avg daily Value ($ mn) NIFTY Fiscal Year End

1,742 3,202 96.05 28 Nov 11 1.38 2.70 4,710 Mar

See page 6 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may www.morganmarkets.com have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Asia Pacific Equity Research 29 November 2011

Company Description Dabur is one of the fastest growing consumer companies with a strong and diversified brand portfolio. Over the last few years, the company has transformed itself from being an ayurvedic (traditional Indian system of medicine) company to a company with a distinct herbal platform to finally become a full fledged fast moving consumer goods (FMCG) player. With the exception of laundry, the Dabur is now present in nearly all FMCG categories. It is also a leading player in the fruit juice segment. Revenue Share (FY11)
Retail Others 0% 2% International 22% Hair Care 19% Oral care 12%

P&L sensitivity metrics

Sales growth assumption Impact of each 1% increase A&P/Sales assumption Impact of each 10bp increase
Source: J.P.Morgan estimates

EBITDA impact (%) 1.5% -0.5%

EPS impact (%) 1.5% -0.6%

Price target and valuation analysis

We maintain our Sep12 TP of Rs110. Our PT is based on a forward multiple of 23x which is at a 10% discount to its 3 year average forward multiple. We believe the discount is justified considering moderating volume growth trends and increased exposure to overseas operations. At current 26x FY12E and 21x FY13E P/E, valuations are unsupportive.

CHD 8%

Foods 10% Home care Digestives & 4% Candies Skin care 5% 4%

Health Supplements 14%

Source: Company

Key downside risks to our price target include 1) deceleration in volume growth, 2) increased competition in personal care categories like skin care, oral care and hair care, and 3) any earnings dilutive acquisition. Key upside risks are higher than expected volume growth, margin expansion and any earnings accretive acquisition.

EPS: J.P. Morgan vs consensus

J. P. Morgan FY12E FY13E 3.7 4.5 Consensus 3.9 4.6

Source: Bloomberg, J.P.Morgan estimates

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Asia Pacific Equity Research 29 November 2011

Figure 1: Domestic Volume growth trends

Overall value growth of 10.5% for domestic business was driven equally by pricing and volume growth. Domestic volume growth trends have moderated on account of adverse inflationary impact. %

15% 15% 16% 14% 13% 12% 12% 12% 12% 11% 12% 10% 10% 10% 10% 9% 10% 10% 9% 8% 6% 4% 2% 0%

7% 5%

Mar-08

Mar-09

Mar-10

Mar-11

Source: Company

Figure 2: Category Growth Trends Domestic (%. YoY)

30%
Hair oil and Foods saw healthy double digits growth while other categories growth remained muted

Sep-07
25% 20% 15% 10% 5% 0% -5%
Source: Company

26.6%

Hair Oil

Figure 3: Domestic A&P/Sales ratio trends

%

Dec-07

Sep-08

Dec-08

Sep-09

Dec-09

Sep-10

Dec-10

Sep-11

Oral Care

Jun-08
6.0%

Jun-09

Jun-10

27.6%

Jun-11

7.7% 0.7% -1.9% Health and Supplements Digestives Skin Care Home Care Foods 0.6%

16.0%
Domestic A&P spends saw a decline of 360bps yoy consistent to prior quarter trend of controlled marketing spend. However, Management expects marketing spends to go up in Q3 on account of new product launches.

12.2% 12.0% 8.0% 4.0% 0.0%

13.0% 10.0% 11.1%

13.6%

15.4% 12.2%

14.3%

14.9% 12.8% 11.9% 12.1% 9.1% 11.0% 8.3%

Dec-08

Dec-09

Dec-10

Jun-08

Jun-09

Jun-10

Jun-11

Source: Company reports.

Mar-08

Mar-09

Mar-10

Mar-11

Sep-08

Sep-09

Sep-10

Sep-11
3

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Dabur India Limited: Summary of Financials

Income Statement Rs in millions, year end Mar Revenues % change Y/Y EBITDA % change Y/Y EBIT % change Y/Y EBIT Margin Net Interest Earnings before tax % change Y/Y Tax as % of EBT Net income (reported) % change Y/Y Shares outstanding EPS (reported) % change Y/Y FY09 28,053 18.8% 5,128 17.2% 4,679 16.6% 16.7% -232 4,447 15.7% -540 12.2% 3,911.0 17.1% 1,738 2.25 17.1% FY10 33,914 20.9% 6,636 29.4% 6,133 31.1% 18.1% -123 6,010 35.1% -1,005 16.7% 5,012.9 28.2% 1,741 2.88 28.0% FY11 40,775 20.2% 7,803 17.6% 7,179 17.1% 17.6% -100 7,079 17.8% -1,390 19.6% 5,686.2 13.4% 1,750 3.25 12.9% FY12E 51,102 25.3% 9,112 16.8% 8,374 16.6% 16.4% -213 8,161 15.3% -1,632 20.0% 6,528.5 14.8% 1,750 3.73 14.8% FY13E 58,448 14.4% 10,523 15.5% 9,731 16.2% 16.7% 63 9,794 20.0% -1,959 20.0% 7,834.8 20.0% 1,750 4.48 20.0% Cash flow statement Rs in millions, year end Mar EBIT Depr. & amortization Change in working capital Taxes Cash flow from operations Capex Disposal/(purchase) Net Interest Other Free cash flow Equity raised/(repaid) Debt raised/(repaid) Other Dividends paid Beginning cash Ending cash DPS Ratio Analysis Rs in millions, year end Mar EBITDA margin Operating margin Net margin FY09 4,679 449 -947 -616 3,221 -1,664 -232 1,671 1,557 1 1,303 0 -1,297 766 1,483 0.87 FY09 18.3% 16.7% 13.9% FY10 6,133 503 -394 -1045 4,989 -1,604 -123 -727 3,385 3 -556 0 -1,777 1,567 1,923 1.10 FY10 19.6% 18.1% 14.8% FY11 7,179 624 -1,346 -1250 5,012 -9,313 -100 15,742 -4,301 1 8,705 0 -2,277 1,923 2,725 1.15 FY11 19.1% 17.6% 14.0% FY12E 8,374 739 524 -1632 7,791 -1,500 -213 -1,649 6,291 0 0 0 -3,149 2,725 5,866 1.50 FY12E 17.8% 16.4% 12.8% FY13E 9,731 793 -107 -1959 8,520 -1,500 63 -2,174 7,020 0 0 0 -3,674 5,866 9,212 1.75 FY13E 18.0% 16.7% 13.4%

Balance sheet Rs in millions, year end Mar Cash and cash equivalents Accounts receivable Inventories Others Current assets

FY09 1,484 1,779 3,755 2,490 10,686

FY10 1,923 1,198 4,262 3,674 12,354

FY11 2,724 3,555 7,085 5,161 21,783 1,017 15,417 38,429 7,141 6,425 13,565 10,510 402 24,477 13,911 7.95

FY12E 5,866 3,080 7,361 5,110 24,676 1,017 16,178 42,084 7,696 6,144 13,840 10,510 402 24,753 17,290 9.88

FY13E 9,212 3,523 8,279 5,845 30,116

LT investments 2,292 1,345 Net fixed assets 5,592 6,767 Total Assets 18,805 20,729 Liabilities Short-term loans Payables 4,615 4,669 Others 3,351 4,506 Total current liabilities 7,966 9,175 Long-term debt 2,300 1,793 Other liabilities 305 370 Total Liabilities 10,571 11,338 Shareholders' equity 8,188 9,354 BVPS 4.71 5.37 Source: Company reports and J.P. Morgan estimates.

Sales per share growth 1,017 Sales growth 16,886 Net profit growth 48,232 EPS growth Interest coverage (x) 8,655 Net debt to equity 7,173 Sales/assets 15,828 Assets/equity 10,510 ROE 402 ROCE 26,740 21,451 12.26

18.8% 18.8% 17.1% 17.1% 22.10 -4.4% 1.68 2.30 54.5% 53.0%

20.7% 20.9% 28.2% 28.0% 53.82 -15.3% 1.72 2.12 57.2% 56.7%

19.7% 20.2% 13.4% 12.9% 77.96 32.6% 1.38 2.76 48.9% 40.4%

25.3% 25.3% 14.8% 14.8% 42.79 8.0% 1.27 2.43 41.9% 32.1%

14.4% 14.4% 20.0% 20.0% -9.1% 1.29 2.25 40.5% 32.6%

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Asia Pacific Equity Research 29 November 2011

JPM Q-Profile
Dabur India Ltd. (INDIA / Consumer Staples)
As Of: 25-Nov-2011 Quant_Strategy@jpmorgan.com

Local Share Price

140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 Oct/96 May/97 Dec/97 Jul/98 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 May/04 Dec/04 Jul/05 Feb/06 Sep/06 Apr/07 Nov/07

Current:

98.10

12 Mth Forward EPS

5.00 4.00 3.00 2.00 1.00 0.00 -1.00

Current:

4.37

Jun/08

Jan/09

Aug/09

Mar/10

Oct/10

May/11

-2.00 May/97 Jul/98 May/04 Jul/05 May/11 May/11 May/11 May/11 Oct/96 Dec/97 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 Dec/04 Feb/06 Sep/06 Apr/07 Nov/07 Jun/08 Jan/09 Aug/09 Mar/10 Mar/10 Mar/10 Oct/10 Oct/10 Oct/10 Oct/10

Earnings Yield (& local bond Yield)

14% 12% 10% 8% 6% 4% 2% 0% Oct/96 May/97 Dec/97 Jul/98 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 May/04 Dec/04 Jul/05 Feb/06 Sep/06 Apr/07 Nov/07
12Mth fwd EY India BY Proxy

Current:

4%

Implied Value Of Growth*

1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 Oct/96 May/97 Dec/97 Jul/98 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 May/04 Dec/04 Jul/05 Feb/06 Sep/06 Apr/07 Nov/07 Jun/08

Current:

67.72%

Jun/08

Jan/09

Aug/09

Mar/10

Oct/10

May/11

Jan/09

PE (1Yr Forward)
60.0x 50.0x 40.0x

Current:

22.4x

Price/Book Value
200.0x 150.0x 100.0x
PBV hist PBV Forward

Current:

Aug/09

10.5x

30.0x 20.0x 10.0x 0.0x Oct/96 May/97 Dec/97 Jul/98 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 May/04 Dec/04 Jul/05 Feb/06 Sep/06 Apr/07 Nov/07 Jun/08 Jan/09 Aug/09 Mar/10 Oct/10 May/11 50.0x 0.0x -50.0x Oct/96 May/97 Dec/97 Jul/98 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 May/04 Dec/04 Jul/05 Feb/06 Sep/06 Apr/07 Nov/07 Jun/08 Jan/09 Aug/09

ROE (Trailing)
70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 Oct/96 May/97 Dec/97 Jul/98 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 May/04 Dec/04 Jul/05 Feb/06 Sep/06 Apr/07 Nov/07

Current:

39.19

Dividend Yield (Trailing)

4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Oct/96 May/97 Dec/97 Jul/98 Feb/99 Sep/99 Apr/00 Nov/00 Jun/01 Jan/02 Aug/02 Mar/03 Oct/03 May/04 Dec/04 Jul/05 Feb/06 Sep/06 Apr/07 Nov/07 Jun/08

Current:

1.18

Jan/09

Aug/09

Jun/08

Jan/09

Aug/09

Mar/10

Oct/10

Summary
Dabur India Ltd. INDIA Consumer Staples 12mth Forward PE P/BV (Trailing) Dividend Yield (Trailing) ROE (Trailing) Implied Value of Growth 3347.69 0.2277351 SEDOL 6297356 Personal Products Latest Min 9.15 22.45x 2.46 10.51x 0.01 1.18 16.67 39.19 0.04 67.7% 25-Nov-11 As Of: 98.10 Local Price: 4.37 EPS: % to Max % to Med % to Avg 132% -11% -10% 1455% 17% 85% 236% 1% 5% 55% 0% -1% 31% -9% -16%

Max 52.18 163.53 3.98 60.87 0.88

Median 19.96 12.31 1.20 39.19 0.62

May/11

Average 20.26 19.47 1.24 38.63 0.57

2 S.D.+ 34.64 71.09 2.98 70.13 0.91

2 S.D. 5.87 -32.16 -0.49 7.13 0.23

% to Min -59% -77% -99% -57% -94%

Source: Bloomberg, Reuters Global Fundamentals, IBES CONSENSUS, J.P. Morgan Calcs

* Implied Value Of Growth = (1 - EY/Cost of equity) where cost of equity =Bond Yield + 5.0% (ERP)

Mar/10

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Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

Client: J.P. Morgan currently has, or had within the past 12 months, the following company(ies) as clients: Dabur India Limited.
Dabur India Limited (DABU.BO) Price Chart

192

N Rs48.5 N Rs47 N Rs52.5

N Rs82.5 N Rs62.5

Date 26-Oct-07 29-Jul-08

N Rs86 Rs100 N N Rs102 Rs108N Rs110 N

Rating Share Price (Rs) N N N N N N N N N N N N 55.72 46.43 41.18 42.83 51.85 68.13 76.20 88.40 101.78 93.55 117.60 101.30

Price Target (Rs) 60.00 52.50 47.00 48.50 52.50 62.50 82.50 86.00 100.00 102.00 108.00 110.00

160

128 N Rs60 Price(Rs)

N Rs52.5

03-Nov-08 30-Jan-09 30-Apr-09 29-Jul-09 28-Oct-09 14-Apr-10 28-Jul-10 02-Feb-11 01-Jun-11

96

64

32

0 Oct 07 Jul 08 Apr 09 Jan 10 Oct 10 Jul 11

01-Nov-11

Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends. Initiated coverage Oct 26, 2007.

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings: OW = Overweight, N= Neutral, UW = Underweight Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst's (or the analyst's team's) coverage universe.] In our Asia (ex-Australia) and UK small- and mid-cap equity research, each stocks expected total return is compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research website, www.morganmarkets.com. Coverage Universe: Chopra, Latika: Colgate-Palmolive (India) Limited (COLG.BO), Dabur India Limited (DABU.BO), GlaxoSmithKline Consumer Healthcare Limited (GLSM.BO), Godrej Consumer Products Limited (GOCP.BO), Hindustan Unilever Limited (HLL.BO), ITC Limited (ITC.BO), Nestl India Limited (NEST.BO), Pantaloon Retail (India) Ltd (PART.BO), Titan Industries Limited (TITN.BO), United Spirits Limited (UNSP.BO), Zee Entertainment Enterprises (ZEE.BO)

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J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2011

Overweight (buy) 47% 51% 45% 70% Neutral (hold) 42% 44% 47% 60% Underweight (sell) 11% 33% 7% 52%

J.P. Morgan Global Equity Research Coverage IB clients* JPMS Equity Research Coverage IB clients*

*Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.morganmarkets.com , contact the primary analyst or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com . Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking. Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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Asia Pacific Equity Research 29 November 2011

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