managementdiscussion-analysis on fmcg industry

8/7/2019 ManagementDiscussion-Analysis on FMCG Industry

1/15

Annual Report 2004-05 9

Management Discussion and Analysis

INDUSTRY STRUCTURE AND DEVELOPMENTS

The year 2004-05 has been a year of sustained growth for the economy as well as for your Company.

The year saw a revival in the FMCG sector which emerged from a phase of sluggish demand to

report strong growth in most consumer categories.

In 2003-04, we had seen that while the Indian economy grew by a remarkable 8.5 per cent, the

FMCG sector continued to remain sluggish. In last years Annual Report, we had pointed out that

one good year was not sufficient to improve consumer confidence and improve the fortunes of

the FMCG sector. We felt that it needed a few consecutive high growth years to sustain economic

development and increase demand for FMCG products. With the economy growing by 6.9 per cent

in 2004-05, we have witnessed two successive years of impressive income growth with per

capita income increasing by 7.1 per cent in 2003-04 and by 5.2 per cent in 2004-05. This growth in

incomes has contributed substantially to a sharp turnaround in the FMCG sector (see Chart A).

It is important to realise that this years revival in the FMCG

sector has been largely volume driven, with improved off-

take in urban as well as rural areas. The volume growth

has also been accompanied by a degree of price

stabilisation, especially after a couple of years of fierce price

competition in some FMCG segments. Companies have had

to reposition brands, create niches for their products and

improve distribution systems to make the best out of the

opportunities offered by an improved market environment.

Through a structured implementation of strategic initiatives

over the last couple of years, Dabur had geared itself for

the challenges thrown up during the year. The Company

had already positioned itself on the herbal specialist

platform to create a niche within the FMCG space. Even

before 2004-05, a robust brand architecture with five

umbrella brands was put in place with a well-calibrated mix

of products under each brand. On the distribution side,the process of streamlining of the sales organisation had

begun a couple of years ago. This was further consolidated

during 2004-05, which helped the Company penetrate much

deeper into semi-urban and rural markets and tap into the

demand growth in these areas.

On the costs side, there has been a growing concern of

escalating input cost especially of oils, packaging

materials and transportation. Chart B shows that WPI-based

inflation increased from 4.8 per cent at the beginning of

2004-05 to levels above 8 per cent during September 2004,and remained above 5 per cent for most of the year.

Competitive pressures prevented all FMCG companies from

passing on these cost increases to customers. Therefore,

for the industry as a whole, margins were under some

pressure.

Source: ORG MARG, based on sales value


2/15

10 Dabur India Limited Management Discussion & Analysis

Chart B: Inflation (WPI)

To mitigate the cost push effects, Dabur has developed an

optimal mix of manufacturing facilities at different locations

to reap maximum benefits from fiscal concessions and

economies of scale. In addition, further efficiencies in the

supply chain right from procurement to production helped

to cap input costs. These operational factors coupled with

good sales growth helped the Company generate

impressive profits and return to investors. The highlights

of Dabur India Limiteds performance in 2004-05 are:

Revenue from operations increased by 10.5 per cent

from Rs.1147.9 crore for 2003-04 to Rs.1268.7 crore in

2004-05

Operating profit (EBIDTA) increased by 36 per cent from

Rs.138.2 crore in 2003-04 to Rs.187.9 crore in 2004-05

Interest outgo decreased by 38 per cent from Rs.6.9

crore in 2003-04 to Rs. 4.3 crore in 2004-05.

Profit after tax (PAT) increased by 46.3 per cent from

Rs.101.2 crore in 2003-04 to Rs.148 crore in 2004-05.

Return on capital employed (ROCE) increased from 34.9

per cent in 2003-04 to 38.7 per cent in 2004-05

Return on net worth (RONW) increased from 38.6 per

cent in 2003-04 to 44.5 per cent in 2004-05

To enhance the perception of Dabur as a contemporary

organisation one that is in tune with customer needs

the Company launched the new identity of its flagship brand

Dabur during 2004-05. While leveraging Daburs 100 year

old brand equity by retaining the essence of the banyan

tree, the new brand identity projects a more modern image

in consonance with todays lifestyle.

The new visual identity expresses a brand that is dynamic,

proactive and progressive. These characteristics are not

limited to perception building exercises but are integral to

Daburs pursuit of profitable growth.

The Companys growth in 2004-05 was fuelled by launching

new products, entering new categories, spreading its

geographical reach and growing its relatively smaller

product portfolios like foods. While the parent company

Dabur India Limited (DIL), continues to be the driving entityoperating in the herbal specialist space in India, the food

business is undertaken by DILs subsidiary company Dabur

Foods Limited (DFL). The international business is carried

out by the Dubai based subsidiary, Dabur Internationa

Limited. Going forward, it is important to look at Daburs

business on a consolidated basis, as the future business

plans will involve Dabur India Limited and all its subsidiaries

working as a cohesive unit. The highlights of the Companys

consolidated financial performance are:

Consolidated Net Sales from operations increased by15.6 per cent from Rs.1329.6 crore in 2003-04 to

Rs.1536.9 crore in 2004-05

Consolidated Profits after tax (PAT), after accounting

for minority interests, increased by 46.3 per cent from

Rs.106.5 crore in 2003-04 to Rs.155.8 crore in 2004-05

We have always maintained that while organic growth is

the focus area, we would be always open to value

enhancing inorganic growth opportunities. The Company

had accumulated significant cash reserves over a period

of time which needed to be invested judiciously; Dabur

was, therefore, on the lookout for good acquisition

opportunities.

In 2004-05, the Company found a good value proposition

and undertook its largest acquisition till date, by acquiring


3/15


Balsaras hygiene and home products business in an all-cash

deal. The Board of Directors of Dabur India Limited approved

of this deal in its Board meeting held on 27 January, 2005,

and the acquisition of shares took place on 1 April, 2005,

after obtaining shareholders approval.

As part of the deal, Dabur has acquired the entire promoters

stake in three Balsara companies: 99.4 per cent in Balsara

Hygiene Products; 100 per cent in Balsara Home Products;

and 97.9 per cent of the shareholding in Besta Cosmetics

Limited. The cost of all three taken together has been Rs.140

crore.

The acquisition was largely funded through internal accruals

- out of the Rs.140 crore investment, only Rs.20 crore was

funded through debt.

The Balsara acquisition would add sales turnover of

approximately Rs.200 crore to Dabur and brings with it three

manufacturing facilities located at Silvassa, Kanpur and

Baddi. It operates in three business segments, with unique

positioning in each:

Oral CareOral CareOral CareOral CareOral Care: With its clove oil based Promise toothpaste,

Balsara was a pioneer in herbal oral care products in

India. Balsara also has a strong presence in the value

segment with Babool toothpaste and in the premium

segment with Meswak toothpaste.

Taken together, the Balsara oral care brands hold

around 4.5 per cent share of the toothpaste market.

Household Care:Household Care:Household Care:Household Care:Household Care: In this segment, too, Balsara has

entrenched brands. Odonil is almost a generic name

in the air freshener segment; Odomos has a dominant

share in the personal application based insect

repellents market; Sanifresh is the second highest

selling toilet cleaner in India; Odopic, which is a

dishwashing and surface cleaner has strong brand

equity in western India. The category market size is

estimated to be Rs.2,000 crore, and has extremely

attractive growth opportunities given its current low

market penetration levels.

Contract ManufacturingContract ManufacturingContract ManufacturingContract ManufacturingContract Manufacturing: This includes the private label

and herbal extracts and complexes business catering

mainly to the international market.

There were several reasons for Dabur to believe in the value

proposition that Balsara business offers. First, its oral carebusiness fits well with Daburs herbal positioning and wil

allow the Company to offer a range of strong products

across different price points in this segment. Second, the

household care products will allow Dabur to expand into a

new product category that has very low penetration levels

and high growth potential.

Third, the combined entity can reap greater benefits from

economies of scale and scope in terms of advertisement

expenses, synergies in marketing, sales and distribution

and greater utilisation of backend services. Fourth, in termsof geographies, Balsaras strength in the West and the South

complements Daburs strength in the North and East India

Given these factors, Balsara has a strong strategic fit with

Dabur, and we believe that the acquisition will generate

positive gains for the Balsara business as well as the

consolidated entity and will prove to be a value enhancing

initiative.

In the following sections we look at the developments in

Daburs different businesses in India and abroad.

SEGMENT-WISE AND PRODUCT-WISE

PERFORMANCE

Domestic FMCG Business

In India, the Companys business is carried out by three

divisions Consumer Care Division (CCD), Consumer

Healthcare Division (CHD) and the wholly owned subsidiary

Dabur Foods Limited. On a consolidated basis CCD

contributes 82 per cent, CHD contributes 8 per cent and

DFL contributes 10 per cent to the Companys domestic

revenues. While CCD remains the leading division and a

focus area, during 2004-05 the Company undertook several

initiatives to consciously grow the smaller divisions CHD

and Foods. These divisions, with relatively smaller sales

bases, are seen as key drivers of future growth.


4/15


this exercise by developing new products and packaging

which are customised to the distinct tastes and needs of

the South Indian consumer.The South India initiative hasbegun to pay dividends as sales in the region grew by 23.6

per cent during 2004-05, and its contribution to CCD sales

increased from 7.1 per cent in 2003-04 to 8.2 per cent in

2004-05.

Hair Care

Hair Care, which is the largest category in Daburs CCD

portfolio with a 38 per cent share, registered a growth of

11 per cent during 2004-05. From a market perspective,

the two groups of products in this category hair oil and

shampoos witnessed diametrically opposite market

movements. While in hair oils the market grew faster invalue terms compared to volumes, in shampoos, the value

growth was far less than that of volume. This development

in shampoos was a direct fall-out of fierce price based

competition in the first half of 2004-05. In the latter half,

there has been an element of price stabilisation with all

FMCG companies repositioning their products in new price

segments and consolidating their presence.

In hair oils, Dabur Amla hair oil grew by 15.9 per cent during

2004-05 in value terms, and net sales crossed Rs.200 crore

During the year, the brand communication for this productwas transformed from being a purely functional one, to a

more evolved and trendy message. Vatika hair oil registered

double digit growth, with sales value increasing by 13.1

per cent in 2004-05. The product increased its market share

in the hair oil category from 6.9 per cent in 2003-04 to 7.6

per cent in 2004-05. Dabur continued to promote this brand

with its concept of Vatika Women. The Superbrand Counci

of India acknowledged the strength of the Vatika

brand and it was adjudged as one of the 101 super brands

in India.

There has been a concerted effort to develop the Anmol

brand on the economy platform across product categories

Under this, your Company had made an entry into the large

mustard oil market with its branded hair oil offering

Anmol Sarson Amla Hair oil. In its first full year in the market

Consumer Care Division

The FMCG business of the Company is housed in this division

and offers a wide range of products in hair care, oral care,

health supplements, digestives and candies, and baby andskin care. Chart C gives the relative contribution of these

categories to total sales of the Consumer Care Division.

Chart C : Category Contributions

CCDs net sales increased by 8.9 per cent from Rs.1,001.2

crore in 2003-04 to Rs.1089.9 crore in 2004-05. A number ofnew products in various categories have been launched in

the last couple of years. Many of these products had the

first full year of marketing during 2004-05 and were the

prime drivers of growth. Sales of new products accounted

for over Rs.75 crore in 2004-05, which was around 8 per

cent of the total sales of the division.

The CCD brands continued to get support from aggressive

advertisement campaigns. While celebrity film stars like

Amitabh Bachchan and Rani Mukherji continue to endorse

Daburs brands, the company signed on cricketer VirendraSehwag to be an ambassador for select brands. During 2004-

05, the company rolled out a focused plan to develop its

south Indian markets, where it had been comparatively

weak. A core group under a new marketing head has been

set up to push this initiative. The Company is supporting


5/15


during 2004-05, the product has shown good growth

prospects.

In line with the price rationalization that happened in the

shampoo category, the Company repositioned some of itsofferings and reduced prices in products such as Vatika

Henna Cream Shampoo. As a result, while Daburs

shampoos registered a 14 per cent growth in volume terms,

its value growth was restricted to 0.4 per cent in 2004-05.

The newly launched Dabur Anmol shampoo range enabled

the Company to gain entry into the economy segment of

the shampoo market.

Health Supplements

This category recorded a growth of 2.4 per cent for 2004-05.

Growth was impacted in the second half of the year largely

due to the country experiencing a delayed and shortened

winter thus adversely affecting off-take of the flagship

product in this category Chyawanprash, which experienced

marginal decline in sales. The Chyawanprash market as a

whole declined by 5.7 per cent during 2004-05. The

Company is in the process of rolling out strategies to expand

the usage of Chyawanprash.

The brand Dabur Chyawanprash bagged the Brand Re-

launch of the Year award at the first Indian Marketing

Awards (IMA) held in October 2004.

The growth driver in this category was Dabur Honey, which

grew by 24.6 per cent in value terms. This brand has been

seeing strong growth due to focused marketing and

advertising support and increasing usage of honey in food

preparations. Sales of Dabur glucose remained stagnant

during 2004-05. An aggressive consumer promotion has

been initiated for this brand supplemented by a new

advertisement campaign.

In order to drive growth in Health Supplements category,

your Company has planned to introduce a unique and

differentiated product in Herbal Nutritional Supplements

category. This product is being test marketed in some select

markets. The Nutritional Supplements category is a large

consumer category in which Daburs healthcare and herbal

equity fits very well and it offers significant growth potential.

Oral Care

Sales of Daburs Oral Care products increased by 10.1 per

cent. This growth has been driven by wide acceptance of

the Dabur Red Toothpaste franchise, which was in thesecond year of its launch. Sales of Dabur Red Toothpaste

increased by over 100 per cent and reached Rs.49.7 crore

in 2004-05.

In toothpowders, where Dabur has been a dominant

player, sales were under stress due to a 7.0 per cent

decline in the entire category. During the second half of

the year, Dabur aggressively pushed this product with a

new advertisement campaign featuring Virendra Sehwag

This helped the company strengthen its position within

the category and increase its market share from 30.1 percent in 2003-04 to 31.7 per cent in 2004-05. However in

the near term, it is the toothpastes that are poised for

good growth.

With the Balsara acquisition, Dabur has strengthened its

position in toothpastes, and now has a robust set of

offerings across different price points. While Babool wil

be positioned in the economy segment, Dabur Red

toothpaste will be positioned in the mid-priced segment

and Meswak in the premium segment. Another Balsara

product Promise toothpaste, which is in the same priceband as Dabur Red Toothpaste, will be positioned under

the white toothpaste platform, and its international brand

equity will be leveraged for exports.

Digestives and Confectionery

During 2004-05, this category recorded a growth of 2 per

cent. While Hajmola tablets registered a 9.1 per cent growth

in 2004-05 with the roll out of a new packaging and

advertisement campaign, sales of Hajmola candy decreased

by 3.3 per cent in 2004-05. The Company has taken steps torevive the sales of Hajmola candies, which includes re-launch

of the product in a smooth format with a more contemporary

packaging. The re-launch was done in West Bengal and

Maharashtra, and will be extended nationally in the first half

of 2005-06.


6/15


The focus on newer formats of Hajmola continued with

launch of an improved goli format of Hajmola Anardana. A

further extension of the Hajmola brand has been planned

with the launch of Hajmola Yumstick, which is a paste in a

stick format and comes in two ethnic flavours imli

(tamarind) and aam (mango). Sales of Pudin Hara liquid

recorded good growth but due to decline in the Pudin Hara

pearls, the overall brand remained stagnant.

Skin Care/Baby Oils

This is the smallest category in CCDs portfolio in terms of

size of sales, but in terms of growth this has been one of

the leaders, with sales increasing by 13.1 per cent during

2004-05. Most of this growth was fuelled by expansions in

skin care products.

Within skin care, Gulabari grew by 21.7 per cent in 2004-05.

The fairness platform has also paid rich dividends as seen

in the 50 per cent growth in Vatika Fairness Face Pack. The

Company has made further inroads into skin care area

through test marketing of Dabur Anmol Cold Cream and a

test launch in West Bengal of Vatika soap with saffron and

honey. Herbal soaps is another area where the equity of

Vatika brand can travel seamlessly to command a niche

position, therefore the Company has decided to make a

calibrated entry into this category.

In baby care, Dabur Lal Tail registered a growth of 9.5 per

cent in 2004-05. The high quality of this product was further

endorsed by the fact that it was the only baby oil that passed

FDA scrutiny in the test which was conducted on all leading

brands of baby oils in Maharashtra.

Consumer Healthcare Business

Consumer Health Division

The Consumer Healthcare Division (CHD) portfolio comprises

of pure granthabased products on the Ayurveda platform,

which can be broadly classified into OTC products, branded

ethical and generics including Asavs and Classicals. This

business includes popular products such as the OTC Asav

tonic brands of Dashmularishta and Ashokarishta and

advertised brands such as Dabur Shilajit, Naturecare,

Shankhpushpi, Honitus and Ring Ring among others. During

2004-05, this divisions sales increased by 12.4 per cent

from Rs. 95.9 crore to Rs.107.8 crore, thus breaking the

Rs.100 crore barrier for the first time. This growth has been

fuelled by strong performance of brands like Shilajit,

Shankhapushp Syrup, Nature Care and Ring Ring. This

business is woven around the Ayurveda segment and

therefore, given the strong Ayurvedic origins of Daburs

equity, constitutes a major focus area for the Company.

The Consumer Healthcare activity has been identified as

one of the growth drivers of your Companys business going

forward. The increasing preference for holistic health

remedies as offered in Ayurveda is leading to a sustained

growth in the Natural/Herbal segments. Your company

plans to lead this growth.

In order to develop this division in a focused manner, the

Company undertook a major organisational restructuring.

This included the appointment of senior professionals with

wide experience in the FMCG and Healthcare industry

Concurrent with these structural changes, the division has

formulated and will implement a synergised business

roadmap during 2005-06.

This strategy stresses on taking quantum jumps in growth

and is centred around two distinct groups of products that

are at two different ends of the divisions product portfolio

the classical granthabased business and the OTC route.

On the branded ethical side, the strategy focuses on

marketing Grantha based products, which are safety and

efficacy driven. Your Company undertakes extensive clinica

trials for most of its products so that the products are tried

and tested before actual use. Your company has a strong

research and development infrastructure comprising about

20 dedicated scientists who are working on developing

and strengthening the Ayurvedic platform scientifically.

Apart from this, the Company is associated with the Dabur

Dhanwantary Foundation in Chandigarh and several other

regional hospitals for promoting education and R & D in the

field of Ayurveda.


7/15


Building a world class OTC capability is central to the

development of this division. The aggressive OTC strategy

is based on connecting customers with Ayurveda using

various elements of the media, doctors and pharmacy

promotions. The idea is to strengthen relationships with

Ayurveda market stakeholders in other words, not just

penetrate the market but also redefine and grow it. This

initiative is being supported by aggressive advertising of

several products like Honitus and Nature Care.

In 2004-05, Dabur Dashmularishta became the first branded

ethical Asav (tonic) to be advertised on television. Marketing

activities continue to focus on increasing endorsement from

healthcare professional (BAMS and Vaids who prescribe

Ayurvedic medicines), developing pharmacy selling,increasing the effective coverage in urban pharmacy

supported by focused media thrust. On the distribution side,

territories have been restructured and additional manpower

deployed wherever necessary. To build effective coverage,

your Company has strengthened the number of retail sales

force personnel and also stockist networks.

In 2004-05 CHD acquired the brand Honitus from de-merged

Dabur Pharmaceuticals Limited. This cough syrup, which has

an Ayurvedic base, was earlier sold through the prescription

route. Now this is being sold over the counter (OTC). Daburs

Consumer Healthcare business continues to be open to

further opportunities for acquisitions and partnerships in

India and abroad and is strategically poised for good growth.

Foods Business

Dabur Foods Limited

Dabur India Limiteds wholly owned subsidiary, Dabur Foods

Limited (DFL) operates on the naturals platform with aproduct portfolio consisting mainly of fruit juices, cooking

pastes, sauces and items for institutional food purchases.

The business sales grew by 51.2 per cent from Rs.85.8 crore

in 2003-04 to Rs.129.7 crore in 2004-05.

The primary growth driver in this business were its two fruit

juice brands Real and Real Activ which, taken together,

recorded an impressive growth of 38.5 per cent. During the

year the Company repositioned its offerings to put in place

a well segmented product strategy. The Company, now has

three distinct brands across the fruit juice category : Real,

Real Activ and Coolers.

The Activ range of juices, which have no added sugar, cater

to the health conscious young adults in the premium segment

Activs new identity, which has now become distinct from the

Real brand, has been brought out in its new contemporary

and trendy packaging. The Activ range now has five flavours

including the two new additions Mixed Fruit Cucumber

Spinach Juice and Mixed Fruit Beetroot Carrot Juice. In order

to target the 18 to 35 age group the smaller packs of Activ

have been enlarged from 200 ML to 330 ML, which is a more

appropriate quantity for a person of this age group to derive

nutritional value from a single drink.

Real continues to be DFLs offering for the medium segment

with growth thrust provided by continuously launching new

flavours.

The economy end of the portfolio consists of Coolers.

These drinks are based on traditional Indian formulations,

which have a cooling effect on the body. They were launched

in 2004-05 in 3 flavours Watermelon, Pomegranate and

Aam Panna. The Company intends to aggressively promote

this brand and also introduce new flavours in 2005-06.

The Hommade brand grew by 31 per cent in 2004-05 with

good growth in Coconut Milk and Tomato Puree. Apart from

these, the brand also offers a range of cooking pastes, and

has recently test marketed a soup concentrate, which shal

be launched nationally during 2005-06.

Institutional sales contribute around 25 per cent of Dabur

Foods turnover. The company intends to bring in moreproducts in this distribution system. A separate brand called

Natures Best has been created for institutional sales and it

consists of products like ketchup and corn powder. There

was impressive growth in sales of honey to institutions,

which is done in special one kg packs.


8/15


care products. Dabur Internationals subsidiary in

BangladeshAsian Consumer Care Private Limited

recorded sales of Rs.10 crore in 2004-05, its f irst full year of

operations. Operations in the Nigerian plant began during

2004-05 and will be scaled up in the next financial year.

There was also renewed growth in the Russian and CIS

markets. Sales in Pakistan registered a 100% growth.

Dabur has formulated structured strategies for its foray into

the international market. Based on market assessment, the

Company has identified 20 focus countries where it is

evaluating the need for having a manufacturing facility or

marketing presence. One of these countries is Pakistan.

Given similar taste patterns as India, this is a good market

for Dabur, but the need to establish a presence there as alocal venture is being carefully evaluated. There are another

set of countries, which are termed as opportunity markets,

where Dabur will forge alliances based on opportunies.

In its first concerted endeavour to extend Daburs products

to the mainstream international markets in developed

countries, your Company is exploring opportunities to enter

into a marketing alliance with some of the well established

retail chains in the UK. There is a large market for herbal based

therapeutic products amongst the mainstream population in

developed markets, dealing primarily with lifestyle ailmentsThe focus of this initiative would be to cater to this market in

UK through OTC products. For this purpose, Dabur needs to

have the selected products and production processes certified

with the Medicines and Healthcare Products Regulatory

Agency (MHRA)the executive approving agency of the UK

government. The Company has already initiated this process

Entry strategies are also being developed to enter the USA

supplements market.

Daburs shareholding in Dabur Nepal has been increased

from 80 per cent to 97.5 per cent by acquiring additional17.5 per cent shareholding from the minority partners based

in Nepal. The shares were acquired by Dabur International

with a view to reduce minority shareholding and retain

maximum profits under the consolidated Dabur umbrella.

International Business

During 2003-04, the Company started giving greater impetus

to the international business. The entire international

operations was reorganised and an umbrella organisationcalled Dabur International Limited was created to provide

focus and structure to the international initiatives. This entity

has an independent team and operates out of Dubai.

Overseas sales grew by 43.4% per cent from Rs.128 crore

in 2003-04 to Rs.183.6 crore in 2004-05. The overseas

impetus has been maintained and the share of overseas in

Dabur total sales increased from 9.6 per cent in 2003-04 to

11.9 per cent in 2004-05. The data of relative domestic and

overseas sales and net profit for the consolidated entity is

given in Table 1.

Domestic Overseas

2004-05 2003-04 2004-05 2003-04

Sales 1353.4 1201.5 183.6 128.0

% of total 88.1 90.4 11.9 9.6

Net Profit 151.7 100.6 5.3 8.7

% of total 96.6 92.0 3.4 8.0

Table 1: Relative share of sales and profits of domestic

and overseas businesses

The Company continues to leverage the herbal specialist

platform in the overseas markets and offers products in

different geographies based on local tastes and demands.

During 2004-05, the Company also made investments in

global brand building which have brought down the net

profit as compared to last year. However the profitability

of the business is expected to improve with increasing

volumes and better utilization of the infrastructure which

has been put in place.

Daburs products are gaining ground in the Middle-East,

which witnessed around 24.4 per cent growth in net sales

during 2004-05 on the back of a major brand building

exercise. In Egypt, the turnover almost doubled in 2004-05

with significant growth in the Companys oral care and hair


9/15


OPERATIONS

Manufacturing

India

In 2004-05, Dabur successfully commissioned its largest and

state-of-the-art manufacturing facility at Rudrapur, Uttaranchal.

Set up in a record time of four months, the plant is now fully

operational and is being used to manufacture Chyawanprash,

Hajmola tablets, Amla hair oil, Vatika hair oil, Lal Tail and Janam

Ghunti. While the Rudrapur facility enjoys similar fiscal benefits

as the Jammu and Baddi plants, the Company remains focused

on leveraging higher operational efficiencies and superior

quality levels from this plant.

As part of our long-standing commitment to environmental

safety and protection, an ultra-modern effluent treatment

plan and an elaborate environmental management system

has been commissioned in Rudrapur. Your Company

believes that with its superior technology, modern

manufacturing processes and exacting quality control

procedures this plant will go a long way in further

strengthening Daburs market position.

Daburs plant in Jammu, commissioned in November 2003,

is also fully operational and is being utilized formanufacturing hair oils, shampoos, Gulabari, Kewra water

and intermediaries. This plant features a modern and

compact shop floor design, lean organization structure,

improved system processes and stringent quality control

norms. Higher batch sizes and larger scales of production

at this facility have contributed to major improvements in

product quality, consistency and productivity.

During 2004-05, Dabur added a toothpaste and Nutritional

Supplements manufacturing capacity at its Baddi plant. The

Company has also set-up a fully operational effluenttreatment plant at this facility.The total capital expenditure

incurred by the Company on these facilities and other

requirements amounted to Rs.56.1 Crore. This has enabled

the Company to enhance manufacturing capacity

significantly besides upgrading technology.

As a result of the Balsara acquisition, Dabur has added three

more manufacturing facilities to its fold, located at Silvassa

Baddi and Kanpur. While the Silvassa and Kanpur facilities

are primarily engaged in manufacturing household range

of products and the private label business, the Baddi plant

produces oral care products, including fluoride based

toothpaste. This plant was set up in 2004-05 and enjoys tax

benefits as are available to new units in Himachal Pradesh.

Dabur Foods multi-fruit processing facility at Siliguri, West

Bengal, became fully operational during the year. The plant

produces pulp and concentrates and has brought the

Company a step closer to achieving full backward integration

and realising the resultant cost efficiencies.

The location of this plant is a major source of its competitive

strength. It is located at the heart of a major fruit-producing

and trading area, thus, giving it access to a variety of fruits

including litchi, guava, mango and tomato at competitive

prices. Moreover, it is in close proximity to the Dabur Foods

juice plant located in Nepal, thereby reducing time and cost

of transportation. The plant meets the stringent

requirements of the Codex Alimentarius Commission

Guidelines, the Recommended International Code of

Practices and the General Principles of Food Hygiene.

In 2004-05, Dabur Foods acquired a new facility near Jaipur

for manufacturing fruit juices. The plant currently has

manufacturing facilities for 200 ml packs. This plant will be

upgraded to manufacture 1 litre and 200 ml packs of Real

brand of fruit juice and the Coolers range of products.

Operations at the Nepal plant have been meeting all

requirements and have not been impacted by domestic

disturbances.

Overseas

Dabur International has manufacturing facilities at Dubai,

Sharjah and in three of its step-down subsidiaries Asian

Consumer Care Private Limited in Bangladesh, Dabur Egypt

Limited in Egypt and African Consumer Care Limited in

Nigeria. During the course of the year, the plant at Nigeria


10/15


became operational. Production at the Bangladesh plant had

begun in 2003-04. This was stabilised, and 2004-05 was the

first full year of operations here.

Quality

Dabur remains resolute in its commitment to enhance quality

levels across its product portfolio. In this regard, over the last

few years, the Company has maintained a sharp focus on

upgrading technology and improving manufacturing

processes at all its plants. As part of its quality assurance

programme, it undertakes regular factory quality audits by

trained quality auditors, ensures compliance with ISO 9000

procedure and implementation of established standard

operating procedures across its manufacturing bases.

Through significant technological up-gradation, the

manufacturing process of Hajmola Anardana Goli has been

made free from human touch, thus, bringing in

improvement in hygiene. The production process of

Hajomla candy has also been upgraded to convert the

product into depositor form, thus giving it a smoother finish.

The Honitus and Nature Care product lines at the Baddi

plant have been set-up to meet appropriate standards of

safety, quality, performance and effectiveness as set by

Medicines and Healthcare Products Regulatory Agency

(MHRA) the executive agency of the Department of

Health, Government of UK. Apart from this, the plants

manufacturing Chyawanprash, Glucose and Honey have

received Hazard Analysis and Critical Control Point

(HACCP) certifications.

Supply Chain

In the current inflationary backdrop, supply chain

efficiencies have assumed even greater importance. Our

initiatives over the last couple of years in supply chain

management have stood us in good stead and during

2004-05, Dabur continued to realize procurement

efficiencies and reduce its input costs in spite of inflationary

pressures. In fact, Dabur is one of the few companies in

the FMCG industry which has reduced its input costs

consistently over the last few years by focusing on high

degree of skills in the area of procurement and materials

management. Through usage of innovative procurement

strategies and modern forecasting and research tools, the

Companys material cost as percentage of sales came down

from 43.7 percent in 2003-04 to 42.9 per cent in 2004-05.

During the year the Company successfully deployed the

Spend Visibility programme in collaboration with Ariba

(earlier FreeMarkets) to further strengthen its procurement

efficiencies. This program has significantly enhanced the

quality of information and visibility in sourcing priorities of

the Company.

The Company is also intent upon creating a backward-

integration platform for herbal inputs, especially those on

the endangered list. To this end, Dabur has made a foray

into contract farming for selected herbs as part of the Agro-

biotechnology initiative. Under this initiative, a number of

backward integration programmes have been set up in

Andhra Pradesh, Tamil Nadu, Haryana, Uttar Pradesh

Himachal Pradesh, Uttaranchal , Jammu and Kashmir and

Nepal to develop sustainable cultivation of these

engendered species through contract farming and buy back

arrangements. Dabur enters into contract farming

agreements with farmers through a local coordinator. The

Company also organizes quality-planting material withpromising genetic potential to farmers on no-profit-no-loss

basis and provides additional technical support. In all about

2500 acres of land and 29 medicinal herbs have been

covered under this programme, which contributes to

environment and adds to the income of farmers in addition

to providing a sustainable source of herbal inputs to

the Company.

Research and Development

R&D has been the cornerstone of Daburs success. The

Research and development activities are undertaken by

Dabur Research Foundation (DRF). DRF is engaged in a wide

spectrum of research on Ayurvedic and herbal products,

organic substances, Phytochemicals (plant derived


11/15


medicines), tissue culture, foods, cosmetics, oral care and

other personal care products. In 2004-05, the research

capabilities of DRF were further braced up with the setting-

up of new world-class laboratories and induction of well-

known scientists in the field.

The depth and knowledge of DRFs research capabilities is

particularly reflected in its success in the area of new

product development. In the year under review, your

Company introduced Dabur Red Toothpaste Gel, Anmol Cold

Cream a moisturiser with saffron and almonds, Anmol

range of herbal shampoos, Vatika Honey and Saffron soap,

the Coolers range and new fruit and vegetable flavours in

the Real Activ range of juices. The Company has also

developed a differentiated product in the herbal nutritional

supplements category which is being launched-all on

innovation-backed platforms. Given their unique properties,

Dabur believes that these products will create a niche for

themselves in their respective markets.

Improving speed-to-market on newly researched products

has been a key focus area of research at DRF. In the past,

commercial production of many researched products was

hampered due to limited focus on devising innovative

production processes. However, with this focus,

improvements have been made in transferring new

products out of the laboratory to commercial production in

a much shorter span of time. In the last few years, Dabur

has given a major thrust to clinical trials and generating

claims support data. To this end, Dabur had entered into a

strong partnership with the Dhanwantri Ayurvedic Hospital

now called Dabur Dhanwantri Hospital in Chandigarh.

This initiative gained further momentum during the period

under review. The Company is working proactively to upgrade

OPD and operation theatre in the hospital as well as to improve

facilities at the training institute. Dabur is also in activecollaboration with Wardha College, Poddar Institute, All India

Institute of Medical Sciences (AIIMS) and Benaras Hindu

University to conduct clinical research and claim support tests.

Till date, the Company has conducted more than 115 clinical

trials with 40 medical institutes across the country.

Going forward, your Company also expects to leverage the

perfumery, flavours and home care product capabilities of

the Balsara R&D centre based in Thane, Mumbai.

Human Resources

Dabur takes great pride in the commitment, competence

and vigour shown by its workforce in all realms of business.

The Company continues to take new initiatives to further

align its HR policies to meet the growing needs of its

business.

To this end, Dabur has introduced a uniform and structured

induction process across all its locations in India. Using

the intranet, post-induction programs have been made

available at all recruitment locations of the Company.

Dabur has also been pursing the Young Manager

Development Program (YMDP) to attract and nurture fresh

talent in the Company. Under this programme, in 2004-05,

the Company recruited 18 candidates from leading

management schools in India.

Under YMDP, each candidate is mentored by a member of

the senior management and is put through a one year cross-

functional training programme. The Company has adopted

the Balanced Scorecard for performance evaluation and

strategy deployment. All four aspects of the scorecard

financial perspective, customer perspective, interna

business process and innovation and learning have been

formally communicated across the management and

individual Key Performance Indicators (KPIs) identified

thereon. Annual appraisals, down to the level of area sales

managers, are based on the parameters identified as KPIs

This has ensured that balance across multiple dimensions

of performance is maintained and that good

accomplishment in one area is not offset by poor executionelsewhere.

Dabur has also set-up Assessment and Development

Centres to provide employees equitable growth

opportunities and a platform to realise their potential. These


12/15


centres employ scientific processes to assess the growth

potential of each individual. Based on this assessment,

employees are placed where their potential is best utilised.

For senior management, this programme is conducted by a

reputed professional organisation.

People development continues to be a key focus area at

Dabur. The Company organises regular Management

Development Programmes (MDPs) in the form of

workshops and training sessions for both the senior and

junior management. A training module has been prepared

for the Companys frontline salesmen, including those on

the rolls of its stockists. Based on this module, the Company

plans to hold day-long workshops at various locations for

over 2,000 frontline salesmen and is currently engaged in

training the trainers programme for this purpose.

Recruitment costs have been brought down through the

introduction of a structured employee referral programme

and creation of centralised employment database with

access control capabilities.

As Dabur builds on the synergies with Balsara, it will have

to deal with the challenges of integrating the two

workforces. The Company is well-placed to manage this

integration process. While the immediate integration focus

will remain on key functional areas required to maintain

continuity in the different businesses, in the medium term

the Company will endeavour to fully-integrate the value

systems and knowledge based capabilities of the two

organisations.

FINANCIAL PERFORMANCE

The abridged financials of Dabur India Limited (DIL) for the

year 2004-05 including revenue, expenditure and profits,

are presented in Table 2.

It may be noted that Daburs financial results as on 31 March

2005 do not account for the Balsara acquisition, which come

into effect from 1 April 2005.

Table 2 : Abridged Profit & Loss Account (Rs. crore)

Dabur India Dabur India Growth

2004-05 2003-04 (%)

1 Net Sales 1,268.7 1,148.0 10.5

2 Other Income 11.5 11.0 4.1

3 Total Revenue 1,280.2 1,159.0 10.5

4 Total Expenditure 1,092.3 1,020.8 7.0

5 EBIDTA 187.9 138.2 36.0

6 Depreciation 17.1 15.8 8.6

7 Amortisation 1.5 2.1 -29.0

8 Interest 4.3 6.9 -37.7

9 PBIT 169.3 120.3 40.7

10 PBT 165.0 113.4 45.5

11 Current tax 13.0 8.8 48.6

12 Deferred tax 4.0 3.5 14.6

13 PAT 148.0 101.2 46.3

14 EPS 5.2 3.5

15 EPS (Diluted) 5.1 3.5

As can be seen in Table 2, Dabur India continues to pursue

its path of high profitable growth. With the renewed

strength of its brands, your Company recorded a 10.5 per

cent growth in net sales, from Rs.1,148 crore in 2003-04 to

Rs.1,268.7 crore in 2004-05. This healthy top-line growth,

accompanied by efficiencies in manufacturing and supply

chain, contributed to a 36 per cent growth in operating

profits (EBIDTA) from Rs.138.2 crore in 2003-04 to Rs.187.9

crore in 2004-05.

Driven by much tighter working capital management,

interest outgo decreased by 37.7 per cent from Rs.6.9 crore

in 2003-04 to Rs.4.3 crore in 2004-05. The company also

continues to operate with negative working capital. These

factors have contributed to an impressive 46.3 per cent

growth in profit after tax (PAT) from Rs.101.2 crore in 2003-

04 to Rs.148 crore in 2004-05. As can be seen in Table 3, all

profitability ratios of the Company have gone up in the

year under review.


13/15


Table 3: DILs Profitability Ratios (%)

2004-05 2003-04

EBDITA/Sales 14.8 12.0

PBT/Sales 13.0 9.9

PAT/Sales 11.7 8.8

ROCE 38.7 34.9

RONW 44.5 38.6

There has been a significant improvement in operating

margin (EBDITA/Sales), which grew from 12.0 per cent in

2003-04 to 14.8 per cent in 2004-05. Net profit margin (PAT/

Sales) has also grown from 8.8 per cent 2003-04 to 11.7

per cent 2004-05. The improved margins have beenprimarily driven by two factors. First, due to improvements

in supply chain and manufacturing, the costs have been

driven down substantially. Second, with the commissioning

of the Jammu, Baddi and Rudrapur plantsall located in

excise free zones the Company has been able to benefit

from the fiscal concessions offered at these locations.

Your Company has also found success in reducing its

working capital cycle significantly over the last couple of

years. The net working capital which was at negative 5 days

of sales in 2003-04 came down further to negative 20 daysof sales during 2004-05. Consequently, the ROCE has

increased from 34.9 per cent in 2003-04 to 38.7 per cent in

2004-05.

The strong bottom line has also pushed up the RONW from

38.6 per cent in 2003-04 to 44.5 per cent in 2004-05.

The Company has declared total dividend of 250 per cent

which translates into dividend payout ratio of 48.3 per cent.

The dividend payout ratio has been maintained inspite of

significant investments made in manufacturing facilities as

well as the Balsara acquisition.

Consolidated Financials

Table 4 gives the abridged financials of Dabur on a

consolidated basis.

Table 4 : Consolidated, Abridged Profit & Loss Account

(Rs. crore)

Dabur Dabur Growth

Consolidated Consolidated (%)

2004-05 2003-04

1 Net Sales 1,537.0 1,329.6 15.6

2 Other Income 9.2 9.1 1.5

3 Total Revenue 1,546.2 1,338.6 15.5

4 Total Expenditure 1,328.1 1,170.4 13.5

5 EBIDTA 218.0 168.3 29.6

6 Depreciation 28.0 24.9 12.5

7 Amortisation 1.5 3.9 -61.5

8 Interest 12.4 15.3 -18.6

9 PBIT 188.5 139.4 35.2

10 PBT 176.1 124.2 41.8

11 Current tax 15.1 11.4 33.012 Deferred tax 4.0 3.5 14.6

13 PAT 157.0 109.3 43.6

14 Minority interest (1.2) (2.8) -57.0

15 PAT after 155.8 106.5 46.3

minority interest

16 EPS 5.4 3.7

17 EPS (Diluted) 5.4 3.7

Driven by impressive growth of the Foods and Internationa

businesses, the net sales of the Company on a consolidated

basis registered a growth of 15.6 per cent from Rs.1329.6

crore in 2003-04 to Rs.1537 crore in 2004-05. The

consolidated net profit (PAT after minority interest) also

posted a strong growth of 46.3 per cent increasing from

Rs.106.5 crore in 2003-04 to Rs.155.8 crore in 2004-05.

As presented in Table 5, all profitability ratios calculated on a

consolidated basis have shown a marked improvement in

2004-05.

Table 5: Dabur Consolidated, Profitability Ratios (%)

2004-05 2003-04

EBDITA/Sales 14.2 12.7PBT/Sales 11.5 9.3

PAT/Sales (after minority interest) 10.1 8.0

ROCE 31.5 29.2

RONW 43.5 38.1


14/15


The highlights of the consolidated performance are as

follows:

Operating profits (EBIDTA) increased by 29.6 per cent

from Rs.168.3 crore in 2003-04 to Rs.218.0 crore in 2004-

05. Operating margin (EBDITA/sales) also grew from 12.7

per cent in 2003-04 to 14.2 per cent in 2004-05.

The interest coverage ratio (ratio of profit before interest

and tax to interest payments) has increased from 9.1

times in 2003-04 to 14.8 times in 2004-05.

Net profit margin (PAT/Sales) increased from 8 per cent

in 2003-04 to 10.1 per cent in 2004-05.

Return on Capital Employed has gone up from 29.2 per

cent in 2003-04 to 31.5 per cent in 2004-05.

Return on Net Worth increased from 38.1 per cent in2003-04 to 43.5 per cent in 2004-05.

RISKS AND CONCERNS

Uncertainties in business offer opportunities and downside

risks. Consequently, your Company recognises the

importance of a well structured system to identify and

manage the different elements of risk. Dabur has

introduced a risk-based control system and appointed risk

officers across all Company locations. The basis of this

process driven risk management system is the risk register

that not only lists a comprehensive set of risks across 15

functional domains but also states control tools under

process owners that are there to minimise each risk. The

inherent risks across operational, strategic and tactical

issues are mapped in terms of likelihood of occurrence

and materiality. Some key areas where risks have been

identified and mitigation tools put in place are:

Brand Equity risksBrand Equity risksBrand Equity risksBrand Equity risksBrand Equity risks These risks are inherent to any

FMCG Company like Dabur, which has a long-term

market standing and high brand equity. They are linked

to issues related to media, PR and competition. The

market space is also filled with counterfeits and spurious

products, which are a threat to the Companys brand

equity and revenue. There are also inherent risks

associated with new products that are constantly being

introduced by Dabur. However Dabur has put in place

necessary systems to mitigate these risks which is

reflected in the high success rate of its new product

initiatives and sustained revenue growth.

Finance and Treasury risksFinance and Treasury risksFinance and Treasury risksFinance and Treasury risksFinance and Treasury risks apart from regular risks

like authorisation risks, reporting risks and exposure

risks, Dabur, with an increasing international presence,

is continuously exposed to risks associated with foreign

exchange fluctuations. Like any other Company, Dabur

is also exposed to risks attached to economic and

political uncertainty.

Supply chain and procurement risksSupply chain and procurement risksSupply chain and procurement risksSupply chain and procurement risksSupply chain and procurement risks These are risks

associated with the market dynamics of the Companysinputs, where the Company needs to take positions.

There are systems in place that enhance transparency

and scientific decision making in procurement and

production planning. Many of the Companys inputsare

in the nature of herbs and plant extracts, some of which

are endangered. Your Company has put in place a

system of backward linkages where contract farming

of such inputs is promoted.

Other set of risksOther set of risksOther set of risksOther set of risksOther set of risks deal with development and retention

of human resources, compliance and regulatoryactivities, data security and recovery systems across

the companys IT infrastructure and issues related to

quality and research and development. The Company

is putting in place a Business Continuity Plan and a

Disaster Recovery Plan to mitigate risks in the event of

unforeseen exigencies.

The enterprise-wide risk management system analyses and

deals with these risks based on the overall objective with a

focus on identifying, assessing and subsequently

developing controls to minimise risks. The framework sodesigned ensures adherence to the rules, regulations and

internal policies of the company. A Chief Risk officer has

been appointed, who is responsible for the entire risk

governance of the Company.


15/15


INTERNAL CONTROL SYSTEMS AND

THEIR ADEQUACY

Dabur has a robust internal audit and control system. The

internal control system at Dabur is a process, overseen by

the Board of Directors, management and other personnel,

that provides reasonable assurance regarding the

effectiveness and efficiency of operations, reliability of

financial reporting, and compliance with applicable laws

and regulations

Price Waterhouse Coopers is the internal auditor for the

Company and its subsidiaries. The Companys Internal Audit

function is staffed with qualified and experienced people.

The Standard Operating Procedures (SOPs) put in place bythe Company, are in line with the best global practices,

and have been laid down across the process flows, along

with authority controls for each activity. In the year under

review, Dabur has introduced the COSO framework for

internal controls and adequacy of internal audit. Under this

framework, various risks facing the Company are identified

and assessed routinely across all levels and functions and

suitable control activities are designed to address and

mitigate the significant risks. The Internal Audit Department

reports to the Audit Committee and recommends control

measures from time to time. To read the report of the Audit

Committee on internal control and adequacy, refer to the

section on Corporate Governance of the Annual Report.

OPPORTUNITIES, THREATS AND

OUTLOOK

Dabur is cautiously optimistic about its prospects in 2005-

06. We believe that, if the Indian economy continues to

grow by over 6.5 per cent, demand for FMCG products is

bound to increase. However, a bulk of this demand growthwill be from smaller towns and rural centres. This also points

to the fact that growth will largely be volume driven. The

major concern for 2005-06 is to do with prices of inputs. It

is widely accepted that with output prices under pressure

and input costs being higher, the sector will face margin

pressures.

With the possibility of Foreign Direct Investment being

allowed in the retail sector and consequent entry of large

international retail chains, the FMCG industry will see some

structural changes happening which could result in a strong

growth momentum. Your Company is gearing up to

capitalize on this opportunity by putting in place a

specialized sales structure dedicated to modern retai

channels.

The challenge for your Company in the next financial year

is to be able to accelerate growth and maintain marginsWe believe that by leveraging our herbal specialist brand

equity, offering a wider product portfolio, and strategically

positioning our products in different market segments, we

will largely de-risk ourselves from pricing pressures and

segmental contractions, if any. On the production side,

the location of our plants deriving fiscal benefits, coupled

with procurement and supply chain efficiencies, we will

be able to maintain good margins.

CAUTIONARY STATEMENT

Statements in this management discussion and analysis

describing the Companys objectives, projections, estimates

and expectations may beforward looking statements

within the meaning of applicable laws and regulations

Actual results may differ substantially or materially from

those expressed or implied. Important developments that

could affect the Companys operations include a downward

trend in the domestic FMCG industry, rise in input costs,

exchange rate fluctuations, and significant changes in

political and economic environment in India, environment

standards, tax laws, litigation and labour relations.

managementdiscussion-analysis on fmcg industry

Documents