dabur's $8 b portfolio

Dabur is worth $8 b. It is currently trading at about 49 times its earnings. In 2005 it was available at $0.50 b, or may be less than that. That's the magic of compounding, and wealth creation. It has been consistently earning high rates of return on its invested capital, sustaining its operating margins, and using very low debt. 

It has pretty solid brands, which have helped Dabur earn those excess returns. 

Vatika, Amla and Real brands crossed Rs.10 b in revenues. As reported by the managers, investment in brands, distribution network, new products and consumer connect activities continued building momentum for future growth. Dabur plans to expand its rural connection to over 60,000 high potential villages in the next 2-3 years. Managers point out that according to the World Economic Outlook update prepared by IMF, India is set to become the world's fastest growing major economy ahead of China in the next couple of years. Inflation is expected to come down, and India is expected to grow at a much higher rate in the coming years.

It is surprising, though, that none of the non-executive directors, other than the Chairman (of course by virtue of being a promoter director), hold any shares in Dabur.

Dabur's geographical distribution of revenues (March 2015) is impressive:

Consumer Care is FMCG business in India.

All brands are well known in the market and are doing good business. 

Dabur Health Care includes: Chyawanprash, Honey and Glucose. 

Dabur Digestives include Hajmola and Pudin Hara.

Dabur OTC and Ayurvedic Ethicals include Dabur Lal Tail, Honitus, Janma Ghunti, Dashmularishta, and Ashokarishta.

Dabur's Oral Care business is growing, and includes Dabur Red toothpaste (crossed Rs.3 b revenues), Meswak toothpaste, Babool toothpaste and Dabur Lal Dant Manjan powder.

Under Dabur Hair Care, Vatika and Amla are the strongest brands. 

Dabur Skin Care includes Fem (for fairness bleaches and hair removing creams), Oxylife (bleaches and facial kits) and Gulabari (for rose-based skin care).

Dabur Home Care includes Air Freshners, Mosquito Repellents and Toilet Cleaners. 

Under Food products, Dabur claims to be a dominant player with the brand Real.

Dabur's International Business is dominant in the Middle East and Africa.

It has manufacturing facilities in the UAE, Egypt, Nigeria, Turkey, Tunisia, Nepal, Bangladesh and Sri Lanka.

We are aware that Dabur has generated value for its shareholders. The question is whether it will continue to do so in future. Value is about future cash flows, and these depend upon excess returns, which are driven by the competitive advantages of the business. We can argue that Dabur has the capacity to earn return on capital in excess of its cost of capital. It is a high quality business.

However, can it deliver profits to the new shareholders? Would an investor be able to earn returns higher than market returns from Dabur at its current prices?

You could have bought Dabur between 11x and 52x in the past. Even when you bought at 52.62x in 2011, you could earn 14% annual return by 2015. Not bad. But then, can we replicate that by buying at 49x now? You tell me.

Based on its revenues, operating margins, tax rate, return on capital, growth rate, and reinvestment needs, my DCF valuation got the value of Dabur's equity much lower than its current price. So what do we do?

Simple, play the waiting game.