DABUR INDIA LTD

SECURITY ANALYSIS PROJECT

SUBMITTED BY:
CHARU ATTRI MANSIMRAN KAUR KRITIKA SETHI SAGAR ARORA VINEET JAIN SAUMYA CHADHA SHALINI SINGH (GROUP -8)

Page 1

ACKNOWLEDGEMENT
We the members of group 8 would like to express our sincere gratitude to our respected professor Hanumantha Rao for being very supportive during the entire project and who has also helped us furnish the complete information for the project. Also we thank him for giving us this opportunity to conduct valuation for the respective firm. Prof. Hanumantha Rao has been very supportive during the whole course of doing the project. Even in classroom he would encourage us to verify the facts and not resort to guessing. He always taught us to be accurate and informed. It has been a very interesting advent to be working on this project. I was not able to do complete justification to it, but it opened a lot of opportunities to further learning for me. Also my parents have become more aware of the need for financial planning and I am keen on helping them with my domain knowledge.

Page 2

TABLE OF CONTENTS

PARTICULARS Objective Introduction Economic analysis Why is valuation required Calculation of intrinsic value using DCF method Literature Review

PAGE NO. 4 5 12 17 21 24s

Page 3

OBJECTIVE
In our third semester as finance majors, we have been exposed to an important subject of Security analysis. According to the curriculum we had to understand the nuances of the valuation process of various types of securities. Keeping that in mind we have decided to pick up a company and run the following analysis with the stated reasons:(1) EIC Analysis which helps us in building the foundation to the Fundamental Analysis of any firm. In our case we have focussed on the company dabur India Limited and the industry of FMCG and the company Dabur India Ltd. (2) Next we decided to calculate the intrinsic value of the firm using the Discounted Cash Flow model, in order to decide whether the company is trading at par value or a premium value. (3) In India, the investment bankers Basically use the Relative Valuation , So we undertook a relative valuation to also understand the standing of our firm in comparison of the firm To sum it up the objective of the project was to gain practical knowledge in equity valuation and understand whether the company is undervalued or overvalued.

Page 4

Introduction
Products which have a quick turnover, and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG products are those that get replaced within a year. These products are purchased by the customers in small quantity as per the need of individual or family. These items are purchased repeatedly as these are daily use products. The price or value of the products is not very high. These products are having short life also. It may include perishable and non perishable products, durable and non durable goods. Examples of FMCG generally include a wide range of frequently purchased consumer products such as toiletries, soap, cosmetics, tooth cleaning products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals; consumer electronics, packaged food products, soft drinks, tissue paper, and chocolate bars. A subset of FMCGs is Fast Moving Consumer Electronics which include innovative electronic products such as mobile phones, MP3 players, digital cameras, GPS Systems and Laptops. These are replaced more frequently than other electronic products. White goods in FMCG refer to household electronic items such as Refrigerators, T.Vs, Music Systems, etc. The Indian FMCG sector is explained below in detail: (a) Fast Growing Sector In 2005, the Rs. 48,000-crore FMCG segment was one of the fast growing industries in India. According to the AC Nielsen India study, the industry grew 5.3% in value between 2004 and 2005. The Indian FMCG sector is the fourth largest in the economy and has a market size of US$13.1 billion. Well-established distribution networks, as well as intense competition between the organized and unorganized segments are the characteristics of this sector. FMCG in India has a strong and competitive MNC presence across the entire value chain. The middle class and the rural segments of the Indian population are the most promising market for FMCG, and give brand makers the opportunity to convert them to branded products. Most

Page 5

of the product categories like jams, toothpaste, skin care, shampoos, etc, in India, have low per capita consumption as well as low penetration level, but the potential for growth is huge. The Indian Economy is surging ahead by leaps and bounds, keeping pace with rapid urbanization, increased literacy levels, and rising per capita income. The big firms are growing bigger and small-time companies are catching up as well. According to the study conducted by AC Nielsen, 62 of the top 100 brands are owned by MNCs, and the balance by Indian companies. Fifteen companies own these 62 brands, and 27 of these are owned by Hindustan Lever. Pepsi is at number three followed by Thumps Up. Britannia takes the fifth place, followed by Colgate (6), Nirma (7), Coca-Cola (8) and Parle (9). These are figures the soft drink and cigarette companies have always shied away from revealing. Personal care, cigarettes, and soft drinks are the three biggest categories in FMCG. Between them, they account for 35 of the top 100 brands.

Top 10 Companies in FMCG Sector

1. Hindustan Unilever Ltd. 2. ITC (Indian Tobacco Company) 3. Nestl India 4. GCMMF (AMUL) 5. Dabur India 6. Asian Paints (India) 7. Cadbury India 8. Britannia Industries

Page 6

9. Procter & Gamble Hygiene and Health Care 10. Marico Industries The personal care category has the largest number of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks, and Ponds. There are 11 HLL brands in the 21, aggregating Rs.3, 799 crore or 54% of the personal care category. Cigarettes account for 17% of the top 100 FMCG sales, and just below the personal care category. ITC alone accounts for 60% volume market share and 70% by value of all filter cigarettes in India. The foods category in FMCG is gaining popularity with a swing of launches by HLL, ITC, Godrej, and others. This category has 18 major brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it out in the powders segment. The food category has also seen innovations like softies in ice creams, chapattis by HLL, ready to eat rice by HLL and pizzas by both GCMMF and Godrej Pillsbury. This category seems to have faster development than the stagnating personal care category. Amul, India's largest foods company has a good presence in the food category with its ice-creams, curd, milk, butter, cheese, and so on. Britannia also ranks in the top 100 FMCG brands, dominates the biscuits category and has launched a series of products at various prices. In the household care category (like mosquito repellents), Godrej and Reckitt are two players. Goodknight from Godrej is worth above Rs 217 crore, followed by Reckitt's Mortein at Rs 149 crore. In the shampoo category, HLL's Clinic and Sunsilk make it to the top 100, although P&G's Head and Shoulders and Pantene are also trying hard to be positioned on top. Clinic is nearly double the size of Sunsilk. Dabur is among the top five FMCG companies in India and is an herbal specialist. With a turnover of Rs. 19 billion (approx. US$ 420 million) in 2005-2006, Dabur has brands like Dabur Amla, Dabur Chyawanprash, Vatika, Hajmola and Real. Asian Paints is enjoying a formidable presence in the Indian sub-continent, Southeast Asia, Far East, Middle East, South Pacific, Caribbean, Africa and Europe. Asian Paints is India's largest paint company, with a turnover of Rs.22.6 billion (around USD 513 million). Forbes Global magazine, USA, ranked Asian Paints among the 200 Best Small Companies in the World Cadbury India is the market leader in the chocolate confectionery market with a 70% market share and is ranked number two in the total food drinks market. Its popular brands include Cadbury's Dairy Milk, 5 Star, Eclairs, and Gems. The Rs.15.6 billion
Page 7

(USD 380 Million) Marico is a leading Indian group in consumer products and services in the Global Beauty and Wellness space. There is a huge growth potential for all the FMCG companies as the per capita consumption of almost all products in the country is amongst the lowest in the world. Again the demand or prospect could be increased further if these companies can change the consumer's mindset and offer new generation products. Earlier, consumers were using non-branded apparel, but today, clothes of different brands are available and the same consumers are willing to pay more. (b) Scope of the Sector The Indian FMCG sector with a market size of US$13.1 billion is the fourth largest sector in the economy. A well-established distribution network, intense competition between the organized and unorganized segments characterizes the sector. FMCG Sector is expected to grow by over 60% by 2010. That will translate into an annual growth of 10% over a 5-year period. It has been estimated that FMCG sector will rise from around Rs 56,500 crores in 2005 to Rs 92,100 crores in 2010. Hair care, household care, male grooming, female hygiene, and the chocolates and confectionery categories are estimated to be the fastest growing segments, says an HSBC report. Though the sector witnessed a slower growth in 2002-2004, it has been able to make a fine recovery since then. For example, Hindustan Levers Limited (HLL) has shown a healthy growth in the last quarter. An estimated double digit growth over the next few years shows that the good times are likely to continue. (c) Growth Prospects With the presence of 12.2% of the world population in the villages of India, the Indian rural FMCG market is something no one can overlook. Increased focus on farm sector will boost rural incomes, hence providing better growth prospects to the FMCG companies. Better infrastructure facilities will improve their supply chain. FMCG sector is also likely to benefit from growing demand in the market. Because of the low per capita consumption for almost all the products in the country, FMCG companies have immense possibilities for growth. And if the companies are able to change the mindset of the consumers, i.e. if they are able to take the consumers to branded products and offer new generation products, they would be able to
Page 8

generate higher growth in the near future. It is expected that the rural income will rise in 2007, boosting purchasing power in the countryside. However, the demand in urban areas would be the key growth driver over the long term. Also, increase in the urban population, along with increase in income levels and the availability of new categories, would help the urban areas maintain their position in terms of consumption. At present, urban India accounts for 66% of total FMCG consumption, with rural India accounting for the remaining 34%. However, rural India accounts for more than 40% consumption in major FMCG categories such as personal care, fabric care, and hot beverages. In urban areas, home and personal care category, including skin care, household care and feminine hygiene, will keep growing at relatively attractive rates. (d) SWOT Analysis SWOT analysis of this sector is carried as follows: (I) Strengths: Well-established distribution network extending to rural areas. Strong brands in the FMCG sector. Low cost operations

(ii) Weaknesses: Low export levels. Small scale sector reservations limit ability to invest in technology and achieve economies of scale. Several "me-too products.

(iii) Opportunities: Large domestic market. Export potential Increasing income levels will result in faster revenue growth.

(iv) Threats:

Page 9

Imports Tax and regulatory structure Slowdown in rural demand

D) Pestle Analysis

Pest analysis of FMCG sector in India is carried out on political, economical, social and technological aspects. It is explained below: (I) Political: Tax exemption in sales and excise duty for small scale industries. Transportation and infrastructure development in rural areas helps in distribution network. Restrictions in import policies. Help for agricultural sector.

(ii) Economical: The GDP rate of Indian economy is increasing every year. It is expected in future it would be better only in comparison with other countries. Inflation rate is increasing across the world and India is also no exception. The government and Reserve Bank of India both are trying to control the inflation rate with the help of different measures. Increase in disposable income has taken place due to higher GDP rate. The per capita Income is increasing so the customers are having more income to spend for various reasons. Indian FMCG sector recorded 16% sales growth in last fiscal year and it is expected it would further improve in the forthcoming years.

Page 10

The FMCG sector is a 4th largest sector of Indian economy with market size of more than 60,000 crore. The Indian Territory is very large and number of customers is also very high.

(iii) Social: Demographical analysis The Indian culture, social & life styles are changing drastically. The total population is nearly 115 crores and population includes rich, poor, middle class, male, female, located in rural, urban and sub urban areas, different level of education etc. (iv) Technology: Technology has been simplified and available in the industry, where technology is not available then it is brought from foreign countries to meet FMCG sector requirements. Foreign players help in high technological development. With research and development facilities the new technologies are developed alone or with the help of foreign players.

Page 11

ECONOMIC ANALYSIS

Indian Economy Indian economy is likely to see the lowest growth in fiscal 2012-13 since the 3.8% growth recorded in 2002-03. The trends in the first five months of fiscal 2012-13 suggest a sharp growth slowdown in the economy and there are no positives on the horizon going forward. However the silver lining is that efforts to stabilize the economy by policy makers will bear fruit down the line and growth could get back on track from fiscal 2013-14 onwards.

The first quarter 2012-13 GDP growth came in at 5.5%, which was above the 5.3% growth seen in the last quarter of 2011-12 and above consensus estimates of 5% growth.

The 5.5% growth for first quarter 2012-13 is well below RBIs and governments revised GDP growth estimates of 6.5% and 6.7% respectively.

The IIP (Index of Industrial Production) growth for the April- July 2012 period is -0.1% with manufacturing growth at -0.6%. The negative IIP growth for the first four months of the year does not bode well for overall economic growth.

Page 12

Trade numbers are not positive with exports showing a negative 5% growth for the first five months of the year. Weak growth in economies of the US and Euro zone are hitting exports despite a sharp rupee depreciation of over 20% over a one year period.

Direct tax collections are up by just 6.5% in the April-August 2012 period on a year on year basis against a target growth of over 15% for the full year. Net of refunds direct tax collection are up by 28%. Corporate tax collection has grown by just 0.16% in the first five months of the year. Tax collections are reinforcing the slowdown in the economy.

Bank credit growth is up by just 0.36% in the April-August 2012 period. The weak bank credit growth is due to worries of rising NPAs of public sector banks (Non-Performing Assets have gone up by 50% in full year 2011-12). Monsoons are below normal for 2012 though good rains in August and September have reduced the rainfall deficit. Agricultural growth will be hit on below normal monsoons.

The coal block allocation scam, popularly known, as Coalgate will lead to a sharp fall in mining activity as well as cancellations of many power projects. Companies such a BHEL that supply power equipment will see orders being cancelled. Investment activity will be hit on cancellation of the projects and will lead to deterioration in economic growth.

Page 13

Fall of rupee against major currencies, new norms of standard-size packaging, increase in raw material costs due to upward spiralling interest rates and inflation together might dent the performance of the fast moving consumer goods (FMCG) sector.

Input cost inflation, persistent rise in raw material price, rising fuel costs, fluctuation in the currency, dipping industrial growth, slowing global economy together with an overall moderating consumer sentiment might lead to a slow volume growth of FMCG segment in 2013. The sector might take a hit of about 10 to 15 per cent in sales including the semi-urban and rural market as the burden might be shifted to the price-conscious end consumers or else companies will have to opt for down trading.

Based on emerging market scenario and overall macro-economic expectations the Reserve Bank of India (RBI) may go in for a reduction in interest rates to boost the sagging economy, improve demand momentum and investment climate.

FMCG will turn out to be the biggest beneficiary of the reduction in CRR rate.

Page 14

Revised norms for packaging of FMCG products will propel the companies to increase their prices due to high raw material costs eating into their already stressed profit margins.

Many industry experts said that the consumption pattern will moderate as price sensitive Indian consumers will tighten their budget and keep a close watch on their expenses and might even switch over to cheaper variants, regional or local brands to save money.

While nearly 35 out of 100 respondents agreed that soaring inflation and rising interest rates have been adversely impacting the margins of FMCG companies.

Growth Prospect of FMCG sector:

Large Market According to the estimates, by 2030 India population will be around 1.450 Billion and will surpass China to become the World largest in terms of Population. FMCG Industry which is directly related to the population is Expected to maintain a robust growth rate Spending Pattern An increase is spending pattern has been witnessed in Indian FMCG market. There is an upward trend in urban as well as rural market. An increase in disposable income has leads to growth rate in FMCG goods.

Page 15

Changing Profile and Mind Set of Consumer People are becoming conscious about health and hygienic. There is a change in The mind-set of the Consumer and now looking at Money for Value rather Than Value for Money

Advantages to the Sector:

Governmental Policy: Indian Government has enacted policies aimed at attaining international competitiveness

through lifting of the quantitative restrictions, reducing excise duties, and automatic foreign in-vestment and food laws.

Foreign Direct Investment (FDI) Automatic investment approval (including foreign technology agreement within specified norms), up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies (OCBs) investment, is allowed for most of the food

Page 16

processing sector except malted food, alcoholic beverages and those reserved for small scale industries (SSI).

Why is Valuation Required?

It helps us to take investment decisions. If Estimated Value > Market Price, Buy If Estimated Value < Market Price, Dont Buy

Relative valuation is pervasive. Most valuations on Wall Street are relative valuations. Almost 85% of equity research reports are based upon a multiple and comparable. More than 50% of all acquisition valuations are based upon multiples

The popularity of relative valuation is due below mentioned advantages of it; It is less time and resource intensive than discounted cash flow valuation. It is easier to sell. It is easy to defend. Market Imperatives.

Page 17

The strengths of relative valuation are also its weaknesses.

The ease with which a relative valuation can be put together, pulling together a multiple and a group of comparable firms can also result in inconsistent estimates of value where key variables such as risk, growth or cash flow potential are ignored.

Biases in Estimating Multiples: Example: P/E becomes meaningless when we have negative or zero EPS Time Variation in Multiples: Multiples change over time for the entire market and for individual sectors.

To do relative valuation, we need to identify comparable assets and obtain market values for these assets, convert these market values into standardized values, since the absolute prices cannot be compared. This process of standardizing creates price multiples, compare the standardized value or multiple for the asset being analyzed to the standardized values for comparable asset, controlling for any differences between the firms that might affect the multiple, to judge whether the asset is under or overvalued.

Earnings Multiples
It is a term that measures some aspect of a company's financial well-being, determined by dividing one metric by another metric. The metric in the numerator is typically larger than the one in the denominator, because the top metric is usually supposed to be many times larger than the bottom metric.

Page 18

Multiples P/E P/S P/CF

Marico 37.10 4.20 33.92

Godrej 38.23 7.75 36.67

Colgate 36.70 6.08 33.73

Dabur: Average Price per share No. of shares (MN) Mkt val. Of equity 95.03326737 174.2101 16555.75501

As we can see that by using earnings multiples, the average price per share of Dabur is 95.033 but the market price is 132.90.So we can easily interpret that the stock is overpriced.

Value Multiples
It is a ratio used to determine the value of a company. The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. Enterprise multiple is calculated as:

Marico EV/Sales 4.52

Godrej 7.98

Colgate 6.23

Page 19

EV/EBITDA EV/EBIT

29.69 31.91

29.81 30.80

26.68 28.46

Dabur:

Average Mkt value of equity No. of shares (MN) Per Share Price

17,559.34 174.2101 100.7940259

The price per share of Dabur is 100.79 by using value multiple. But the market price is 132.90. So we can easily interpret that it is overpriced. Per Share Price Mkt Value of equity Enterprise Value 97.91 17057.55 17571.41

If we take the average of 95.03326737 and 100.7940259, it is 97.91 and it is still overpriced.

Page 20

CALCULATION OF INTRINSIC VALUE USING THE DCF MODEL

Formulae used: 1. Growth rate = Roce * capital employed 2. ROCE= Operating profit/ capital employed 3. Reinvestment rate =( Capex + change in working capital depreciation)/ operating profit 4. Capital employed = FA+CA- CL Assumptions made: The sales growth rate used is based on the industry average i.e. 18.08%. it has been recorded above 20 % in recent years which will ultimately come down to the in industry average of 18.35 % at the end of 5 years. Excise duty is based on the trend seen in the past three years as a percentage of sales.
Page 21

Other income is not based on sales so it is calculated by taking natural log. Stock adjustment has been taken at an average rate of previous 10 years. Raw material, power and fuel and manufacturing expenses are based on trend in the percentage of sales calculated i.e. Slope taken. Material cost increased disproportionately during the year thereby putting pressure on gross margins of the company. Energy conservation measures taken 209 lakhs saved due to new conservation project Dabur India adopted initiatives to increase efficiency in inventory management; this was reflected in reduction in days of inventory. As quoted in the annual report.

Other manufacturing expenses include: Product improvement, Increased productivity, Improved quality, Resulted in cost saving, Reduced Steam consumption, Safe working condition, Healthy environment, Manufacturing and packaging capacity enhanced, Manpower cost reduced.

Interest rate calculations are done on an average rate of 7.403%. It is assumed that dabur would like to bring down its debt equity ratio to a comparable ratio of 0.22 that is same as that of the industry. Depreciation has been charged using straight line method at the rate of 5.504%. The gross block in the coming years would be at the rate of 40% of the sales amount. Receivables and payables for the company remained at almost similar levels as in the previous year.

The change in working capital is negative which can be interpreted as high managerial efficiency in their business as projected by low inventory and accounts receivables. Dabur has enough cash to pay its bills as in when they become due, hence maximizing their efficiency.

WACC used was calculated based on the BSE index data which helped us to determine the Beta of the Company
Return on Market Risk Free Rate Beta

0.12 0.0821 0.27 Page 22

cost of Equity (ke) Cost of Debt (kd)

0.09 0.11

Growth rate for the Terminal Value calculated as below:

As per 2012 G ROCE REINVESTMENT RATE CAPITAL EMPLOYED

0.050256 0.58426 0.09 3,556.05

RESULT: According to the assumptions made and the DCF model used we were able to infer the following:
Present value of 641.8749199 FCFF 17552.20276 Terminal Value 20811.33325 Total Value 1742100854 No. Of shares 119.4611276 Value per share

537.0602033

595.5124444

694.3462092

790.336704

PARTICULARS MARKET DCF RELATIVE

SHARE PRICE(Rs.) 132.90 119.4611276 92.91

As you can see the share price of Dabur India Ltd seem to be overvalued in comparison to the intrinsic value and also the relative value, which means that it might be suggested to either sell or postpone buying of such securities.

Page 23

Literature Review

Intrinsic value
The actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price. One way to look at it is that the market capitalization is the price (i.e. what investors are willing to pay for the company) and intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value

Methods of computing intrinsic value of a share A Few Assumptions

The method of calculation that we are about to summarize relies on making some basic assumptions about a stock and its future direction. Before beginning the calculation, you will need to: 1. Have a specific investment time horizon in mind and 2. Be able to estimate the future earnings per share over a specific time horizon. Here are some assumptions for Dabur
Page 24

You have an investment horizon of 5 years. The company's EPS (Earnings Per Share) is currently You estimate that the company's EPS will grow at a steady rate of 18.35 % per year over the next 5 years.

FORMULA Forecasted Stock Price in 2017 = Earnings per Share after the 5th year * Average PE Ratio

This formula is actually fairly straightforward when you break it down. We're basically trying to determine how much the company earns per share, and then multiply that amount by the amount that investors are typically willing to pay for those earnings.

Page 25