Are shareholders riding on Dabur growth wave?

During the past decade, the FMCG industry has witnessed robust growth averaging 11%. Multinational FMCG companies have been expanding their distribution reach in the country. - Whereas, the homegrown FMCG companies have been on an inorganic growth trajectory acquiring domestic and international brands.

Dabur with revenues of Rs 41 bn is one such company which has been consolidating itself through brownfield expansion. In 2005, the company acquired Balsara Home & Hygiene Products and Besta Cosmetics, leading providers of oral and household products. Then, in 2008, Dabur bought Fem Care Pharma which is in the personal care products space. Following these domestic actions, - in 2010-11, Dabur expanded its footprint overseas through two global acquisitions. The company acquired Turkey-based Hobi Kozmetik Group, thereby adding a wide range of personal care products to its portfolio, and extending its reach to the Middle East and North African markets. The company also acquired US based Namaste Laboratories which has a specialized range of hair care products catering to the African population.

With these purchases, Dabur's sales and earnings have increased at an average of 17.5% and 26.5%, respectively during the period FY05-11. The company has indeed logged a very impressive growth.

However, a million dollar question still remains. Are shareholders reaping bountiful returns from Dabur's inorganic growth strategy? The answer to this question lies in the 'One-rupee' test which computes the return earned by shareholders for every rupee invested in the company's business. In other words, the increase in market value relative to the increase in net worth of the company.

Dabur's value created per rupee investment declines

(Rs m)	Beginning net worth (A)	End net worth (B)	Inc. in net worth (B-A)	Beginning market cap (X)	End market cap (Y)	Rise in market cap (Y-X)	Value created for every Re 1 invested	Starting D/E ratio	End D/E ratio
FY04-FY05	2861	3,639	778	17,215	31,793	14,578	18.7	0.46	0.4
FY05-FY11	3,639	13,911	10,272	71,061	185,360	114,299	11.1	0.43	0.9

For our analysis, we have not considered the period prior to FY04 since that includes the erstwhile pharmaceutical business that was later de-merged and sold off.

From the table, we see that during the in-organic growth phase of FY05-11, the return on a shareholder's rupee was a strong 11.1, though lower than the 18.7 earned in the prior period FY04-05. Understandably, the acquisition strategy also stretched the company's balance sheet increasing its debt-to-equity ratio from 0.4 to 0.9.

This means that although not as profitable as the organic growth phase, Dabur shareholders can still sleep well at night knowing that the company is capable of generating healthy returns even through acquisitions. It will have to be wary of its high leverage however.

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