Why Dabur needed Fem

At just under three times the trailing enterprise value/ sales (EV/ sales), Dabur hasn't bought skin care player Fem Care cheap. It's true that the business is fairly profitable with an operating profit margin of close to15 per cent, but a price-earnings multiple of 18 times estimated 2008-09 earnings does appear to be somewhat expensive in the current market.

The best part of the deal is that Dabur is not borrowing to fund the acquisition though it might have been better to conserve Rs 200 crore (Rs 2 billion), especially since the retail rollout, which has been incurring losses, will require resources.

What Fem Care brings to the table is a strong product portfolio -- comprising bleaches, hair removing creams and liquid soaps -- which is complementary to Dabur's Gulabari skin-care range, though the latter is positioned itself in the niche herbal/ ayurvedic segment. Nevertheless, Fem Care's range has a presence in some overseas markets and since Dabur too has penetrated some markets abroad, there are clear synergies there.

In the home market, adspends on the the Fem Care range of products will be high and, what's more, any advertising for either the Vatika or Dabur brands will not have a rub-off effect on any of the Fem Care brands, unless the company chooses to change the brand names. Also, Dabur doesn't really need the 3,500 distributors that Fem Care has -- its distribution network is strong enough. And to what extent it can really use the beauty parlour network remains to be seen, though it certainly is an added benefit.

On the whole, Fem Care is a good addition to the portfolio because Dabur didn't have a presence in the skin care space. Perhaps it's better that Dabur sells established brands rather than launch them on its own because recent initiatives --Vatika soaps for instance -- haven't fared too well. Dabur is expected to end 2008-09 with revenues in the region of Rs 2,770 crore (Rs 27.70 billion) and a net profit of Rs 370 crore (Rs 3.70 billion). At the current price of Rs 75, the stock trades at just over 17 times estimated 2008-09 earnings and is not particularly cheap, now that there's less cash on the balance sheet.