Course Code: FIN544 Course Title: Corporate Valuation

Course Instructor: Dr Mahesh Sarva Section: Q5E12

Academic Task No.: 3 Academic Task Title: Valuation of Dabur India Limited Using DCF Model

Date of Allotment: 10th March 2020 Date of submission: 25th April 2020

Student’s Roll no: , A19, and A18 Student’s Reg. no: 11911770, 11908317,
11908759, and 11908498
Evaluation Parameters: (Parameters on which student is to be evaluated - To be mentioned by students
as specified at the time of assigning the task by the instructor)

Learning Outcomes: (Student to write briefly about learning obtained from the academic tasks)

Declaration:

We declare that this Assignment is our individual work. We have not copied it from any other student’s
work or from any other source except where due acknowledgement is made explicitly in the text, nor has
any part been written for me by any other person.

Student’s Signature:

Evaluator’s comments (For Instructor’s use only)

General Observations Suggestions for Improvement Best part of assignment

Evaluator’s Signature and Date:

Marks Obtained: _______________ Max. Marks: ___________

DABUR INDIA LIMITED
COMPANY OVERVIEW

INTRODUCTION
Dabur India Ltd. is one of India's leading FMCG firms with sales over Rs 8,500 Crore & Rs
72,500 Crore market capitalization. Building on a legacy of over 135 years of quality and
experience, Dabur is the most respected brand in India today, and the world's largest Ayurvedic
and Natural Health Care Business.

Dabur India is also a global pioneer with a range of over 250 Herbal / Ayurvedic products in
Ayurveda. Now, its (FMCG ) portfolio comprises five flagship brands with distinct brand
identities — Dabur as the master brand for natural health goods, Vatika for premium personal
care, Hajmola for digestives, Réal for fruit juices and beverages and Fem for decent bleaches and
skin care products.

Today Dabur operates in main categories of consumer goods, such as hair care, oral care, health
care, skin care, home care and food. The ayurvedic company has a wide availability network
which covers 6.7 million retail stores with a high penetration in both urban and rural markets.

Dabur India is also a global pioneer with a range of over 250 Herbal / Ayurvedic products in
Ayurveda. Now, its (FMCG ) portfolio comprises five flagship brands with distinct brand
identities — Dabur as the master brand for natural health goods, Vatika for premium personal
care, Hajmola for digestives, Réal for fruit juices and beverages and Fem for decent bleaches and
skin care products.

Today Dabur operates in main categories of consumer goods, such as hair care, oral care, health
care, skin care, home care and food. The ayurvedic company has a wide availability network
which covers 6.7 million retail stores with a high penetration in both urban and rural markets.

The 135-year-old ayurvedic business, supported by the Burman family, began functioning as an
Ayurvedic medicines company in 1884. Dabur India Ltd. has come a long way from its modest
roots in the Calcutta bylanes to become one of the largest Indian-owned consumer goods firms
with the largest range of herbal and natural products in the world today. Ultimately, Dabur has
succeeded in turning itself from being a family run company into a professionally operated
company. What separates Dabur from the crowd is its desire to evolve before others and still set
new standards in corporate governance & innovation.

Vision
Dedicated to the health & well-being of every household

Principles

This is our company.

We Accept Personal Responsibility, And Accountability To Meet Business Needs.

SWOT ANALYSIS OF DABUR INDIA

STRENGTH:

 Effectively use its resources to produce income, ROCE improving over the past two
years
 Growth in Quarterly Net Profit with growing Profit Margin (YoY)
 Business with Low Debt Annual Net Profits improving over the past two years
 Business with Zero Promoter Commitment
 Near 52 Week High
 Strong Momentum: Market above short, medium and long-term moving averages

WEAKNESSES:

 Companies with rising costs YoY for long-term ventures

 Negative Breakdown First aid (LTP < S1)
 Bearish Engulfing (Bearish Reversal) MFs decreased their shareholding last quarter
 Decline in Net Income (QoQ)
 Decline in Net Profit with decreasing Profit Margin (QoQ)
 Declining Operating Cash Flow: Companies unable to produce net cash
 Big decrease in TTM Net Profit

OPPURTUNITIES:

 In the past three months, brokers upgraded their recommendation or target price.
 RSI (Relative Strength Index) showing market intensity.
 Increasing Purchasing power of people thereby increasing demand.
  Mergers and acquisitions to strengthen the brand.

THREATS:

 Strong Price Earning stocks (PE > 40).

 Intense and increasing competition amongst other FMCG companies.
 Competition from unbranded and local products.

VALUATION OF DABUR INDIA LIMITED USING DCF MODEL

Discounted cash flow valuation, the aim of a discounted cash flow is to estimate the sum of the
business' future cash flow and to discount it back to the present value. We begin with the
expectation that every year we want to earn 10 per cent on our investment. So the question we'll
answer is "What price will I pay for Dabur India Ltd. if I want to earn an annual return of 10 per
cent" For DCF valuation we use the multi-year mean Free Cash Flow growth rate. The discount
rate and the expected cash flow numbers are then used in the formulation of the net present value
which measures the company's intrinsic value as well as the intrinsic value per share.

Discounted Cash Flow Model: The premise of the DCF model is that the value of a business is
purely a function of its future cash flows. Thus, the first challenge in building a DCF model is to
define and calculate the cash flows that a business generates. There are two common approaches
to calculating the cash flows that a business generates.

Unlevered DCF approach: Forecast and discount the operating cash flows. Then, when you
have a present value, just add any non-operating assets such as cash and subtract any financing
related liabilities such as debt.

Levered DCF approach: Forecast and discount the cash flows that remain available to equity
shareholders after cash flows to all non-equity claims (i.e. debt) have been removed.

This approach involves 6 steps

1. Analyzing Historical Performance

2. Calculating cost of capital
3. Forecasting performance
4. Calculating terminal value
 5. Discounting the cash flows to the present at the weighted average cost of capital
6. Calculating the firm value and interpreting results
1. Analyzing Historical Performance:

Management Analysis

Average management tenure of the company is 5.8yrs. And CEO of the company is
Mohit Malhotra who is 50 years old. Mr. Mohit Malhotra has been Chief Executive Officer of
Dabur India Limited since April 1, 2019 and has been its Whole Time Director since January 31,
2019. Mr. Malhotra served as the Chief Executive Officer of Dabur International Ltd., a
subsidiary of Dabur India Ltd until March 31, 2018. He served as the Head of Marketing at
Dabur India Ltd. He has an experience of 23 years in Dabur group in various capacities. He
serves as a Director of Dermoviva Skin Essentials Inc. and Weikfield International (UAE) LLC.
Mr. Malhotra has done Master of Business Administration from Pune University. 

Ownership

Graph representing Insider Trading Volume

Interpretation: According to the above graph we got to know who the major shareholders are
and have insiders been buying or selling. Therefore in 0-3 months 3800 shares sold by
individuals which is valued at approx. Rs 2.0m and 10000 shares brought by company valued t
approx. 4.0m and in 3-6 month there is 7300 shares sold by 2 individuals valued at approx. Rs.
3.4m on the other hand 100000 shares brought by individuals and company which is valued at Rs
45.6m. And in the month of 6-9 there is 129500 shares sold by individuals values at approx. Rs
57.7m on the other hand zero shares brought. In the month of 9-12 500 shares sold by the
individuals which is valued at approx. Rs 1.9m.

Dabur Stock's Price Graph & Average Annual Return

Dabur 10-Year Price Chart

The graph which is mentioned below is showing closing prices of Dabur India Limited
(DABUR) for last 10 years. The below chart uses adjusted close instead of market close prices.
Adjusted close factors in corporate or institutional level actions outside the market.

Graph representing Dabur Stock's Price

Here is the sample of data (first 2 columns) which has been used in the above graph:

Average Annual Return

Assume you had invested in DABUR stock on 06-02-2010. Assume you had remained invested
for 10 years through 04-02-2020. Then the average annual return can be calculated using the
formula shown below.

R = 100 x [(EP/SP) ^1/10 - 1] where,

EP - Dabur price at 04-02-2020 = 509.4
SP - DABUR price at 06-02-2010 = 84.55
and R stands for the annual return.

By substitute the values, we will get the R-value as mention below:

R = 100 x [(509.4/84.55)1/10 - 1] = 19.67 %

The above calculated return corresponds to the past 10-year history of Dabur India Limited.

Share Price

Let’s see how share price of Dabur India Limited performed over time and what events caused
price changes?

Picture representing last 5 year share price of Dabur India Limited

Interpretation: As the above graph is showing the share price of the company for 5 years it is
showing the max and min share price and it is showing the increase from 2015 to 2020 as in
2015 the maximum share price was 318.90 and minimam was 237.25 and in next year of 2016
the maximam price reduced to 309.10 and miniman to 236.35. in 2017 the maximam price
increased to 318.90 again and minimam price was higher than last 2 years which was 259.95
again the price in 2018 increased to 364.65 and minimam price to 268.75 and right now in 2020
the max price is 485.75 and the lowest one is 315.55 and more changes are on the way.
Profitability Ratio Analysis

Year GPR OPR NPR ROCE RONW CR QR ROA DER EPS

2009 19.24 16.90 15.48 47.10 50.50 1.21 0.88 23.48 0.19 4.50
2010 19.84 18.90 15.10 54.11 57.81 0.95 0.64 24.50 0.14 5.80
2011 20.61 19.50 14.36 31.76 42.81 1.51 1.01 19.57 0.23 3.30
2012 18.94 16.80 12.32 33.76 35.56 1.48 0.99 18.89 0.21 3.70
2013 19.34 16.00 13.58 35.39 37.16 1.50 1.07 20.89 0.15 4.40
2014 19.20 16.60 13.80 33.85 35.33 1.66 1.16 21.52 0.02 5.20
2015 29.81 16.70 14.04 31.39 32.64 1.25 0.81 20.67 0.06 6.10
2016 22.52 19.30 16.33 31.51 32.71 1.32 0.91 21.08 0.03 7.10
2017 26.19 19.60 18.86 24.90 27.29 1.48 0.98 19.13 0.08 7.20

2018 27.03 20.90 19.17 23.41 25.36 1.59 1.02 18.44 0.07 7.70

Table representing Profitability Ratio of Dabur India Limited from 2009 to 2018

Return on Capital Employed (ROCE) and Return on Net Worth (RONW)

ROCE & RONW

70

60

50

40

30

20

10

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Graph representing Return on Capital Employed (ROCE) and Return on Net worth (RONW)

Interpretation:
Operating Profit Ratio (OPR) and Net Profit Ratio (NPR)

OPR & NPR

25

20

15

10

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Graph representing Operating Profit Ratio (OPR) and Net Profit Ratio (NPR)

Interpretation:
Current Ratio (CR) and Quick Ratio (QR)

CR & QR
1.8

1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Graph representing Current Ratio (CR) and Quick Ratio (QR)

Interpretation:
Debt Equity Ratio (DER) and Earning per Share (EPS)

DER & EPS

9

0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Graph representing Debt Equity Ratio (DER) and Earning per Share (EPS)

Interpretation:
Reserved Surplus and Shareholder funds

2018

Graph representing Reserved Surplus and Shareholder funds

Interpretation:
Financial Position Analysis

Short Term Liabilities: DABUR's short term assets (₹47.3B) exceed its short term

liabilities (₹27.0B).
Long Term Liabilities: DABUR's short term assets (₹47.3B) exceed its  long term
liabilities (₹2.1B).
Cost of Capital
A firm obtains capital from various sources. The cost of capital of capital of each source of
capital is known as component or cost of capital. The combined cost of all the sources of capital
is called overall or average cost of capital. The component costs are combined according to
weight of each component capital to obtain the average cost of capital or weighted average cost
of capital (WACC). Weighted average cost of capital can be defined as it is the average required
rate of return on the aggregate of investment project. For the Graphite India Ltd company equity,
reserves & surplus and the debt are the sources of funds.

WACC = (We X Ke) + (Wp X Kp) + (Wd X Kd)

Where We (Weight of equity), Wp (Weight of Preference Share), Wd (Weight of Debt), Ke (Cost

of Equity), Kr (Cost of Preference Share), Kd (Cost of Debt).

Cost of Equity: A firm’s external equity consist of funds raised externally through public or
rights issues. The minimum rate of return, which the equity shareholders require on funds
supplied by them by purchasing new shares to prevent a decline in the existing market price of
the equity share is the cost of external equity.

Ke = (Div1)/P0 + g

Where Div1 (expected dividend per share at the end of 1st year), P0 (current market price per
share), g (growth rate)

Cost of Reserves and Surplus: A firm’s internal equity consist of its retained earnings. It is the rate of
return on dividends foregone by equity shareholders. The shareholders generally expect dividend and
capital gain from their investment.

Kr = (Div1)/P0 + g

Where Div1 (expected dividend per share at the end of 1st year), P0 (current market price per
share), g (growth rate)
Cost of Debt: A company may raise debt in a variety of ways. It may borrow funds from
financial institution or public either in form of public deposits or debentures (bonds) for a
specified period of time at a certain rate of interest. A debenture of bond may be issued at par or
at discounted or premium.

Kd = [INT (1-T) + (Bn – B0) / n] / [1/2 (B0+Bn)]

Where INT (amount of interest), B0 (Issue price of the Debt), Bn (Redeemed price of the Debt), n
(number of years), T (interest paid)

All the above formula which are mention above we have used it to calculate the cost of capital
for each component.

To calculate weight of the each Component we have use the following formula:

We = Total Equity /Total funds

Wr = Total Reserves & Surplus /Total funds

Wd = Total Debt /Total funds

Where [Total funds = sum of Total Equity, Total reserves and surplus, Total Debt]

Calculation of Cost of Capital:

 Weighted Average Cost of Capital (in %) Year wise WACC of Dabur India Limited
4
3.65
3.5

3 2.71
2.64
2.46 2.45
2.5 2.25 2.34
2.03
2

1.5

0.5

0
2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Financial Year

Graph: - represents WACC of Dabur India Limited

Interpretation: Weighted average cost of capital is the simple average of cost of equity and cost
of debt. Investors uses the weighted average cost of capital as a tool to decide whether to invest
or not.  The weighted average cost of capital represents the minimum rate of return at which a
company produces value for its investors. According the graph we can see that from past 8 years
Dabur India Limited has low the weighted average cost of capital as it weighted average cost of
capital lies between 2.03 % to 3.65% which means the value of the company is high, it will
attract the investor as it show that the firm is good to invest and possess low risk.

Suggestion: According to us, company can review the structure of its debt in a bid to maintain
the WACC. One option of capital restructuring involves substituting debt for equity, because it
translates to lower costs after taxation. Preference share can be used to reduce as well as
maintain a company's WACC by substituting more expensive common equity with less
expensive preferred equity as Dabur India Limited has never issued preference share.

Debt is also cheaper than equity from a company’s perspective is

because of the different corporate tax treatment of interest and dividends. In the profit and loss
account, interest is subtracted before the tax is calculated; thus, companies get tax relief on
interest. However, dividends are subtracted after the tax is calculated; therefore, companies do
not get any tax relief on dividends. Example: - if interest payments are Rs. 10 million and the tax
rate is 30%, the cost to the company is Rs. 7 million. The fact that interest is tax-deductible is a
tremendous advantage.

2. Forecasting performance:

To forecast the performance of the Dabur Ltd we have taken the next 10 years free or we can
say levered cash flow that remain available to equity shareholders after paying off all other non-
equity claims (i.e. debt) into consideration as to forecast the future cash flows we have taken
already estimated cash flows of the company for 3 years i.e. 2020 , 2021, 2022 and where these
estimates aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate
or reported value by the analysts. We assume companies with shrinking free cash flow will slow
their rate of shrinkage, and that companies with growing free cash flow will see their growth rate
slow, over this period.

Period 1 2 3 4 5 6 7 8 9 10
Actual Estimated
Particular 2019 2020 2021 2022 2023 202 2025 2026 2027 2028 2029
s 4
(FCF) in 12,648. 15,252.00 16,3 18,36 20,0 21, 23,64 25,57 27,60 29,77 32,08
crore 00 21.0 2.00 62.3 815 6.11 3.27 8.90 3.44 0.88
(Rs.) 0 2 .77
Estimated 20.59 7.00 12.50 9.26 8.7 8.39 8.15 7.96 7.84 7.75
growth 4
rate (%)
Cost of 15.20% 15.20% 15.2 15.20 15.2 15. 15.20 15.20 15.20 15.20 15.20
Equity 0% % 0% 20 % % % % %
(CAPM %
Model) or
WACC
Present 13239.5833 1229 12010 1139 107 1011 9497. 8900. 8332. 7793.
Value 3 8.20 .5403 1.24 52. 6.838 7092 8045 1420 3012
722 3 616 466 65 6 48 65
21
Present 104332.839
Value of
10-year
Cash
Flow
(PVCF)
Present Value of 10-year cash flows: At first we have calculated the present value of each year
by taking a discounting rate (r) @15.20% which is the cost of equity as well as WACC of the
firm i.e. cost of the capital by using the following formula:


PV = __FV___

(1+r) n

After getting the present value for each year, we have added all the
present values and that came out to be the present value of future cash flows of next 10 years.

Analyst Future Growth Forecasts

DABUR's forecast earnings growth (12.1% per year) is above the savings rate (6.5%).
Significant rate is rate of return % you would receive on a lower risk government .DABUR's
earnings (12.1% per year) are forecast to grow slower than the Indian market (17.6% per
year).DABUR's earnings are forecast to grow, but not significantly .Significantly is where we
consider anything above 20% annual earnings growth to be significant. DABUR's revenue
(9.7% per year) is forecast to grow faster than the Indian market (8% per year).DABUR's
revenue (9.7% per year) is forecast to grow slower than 20% per year.

3. Calculating Terminal value:

To calculate terminal value we have taken discounted rate (r) @15.20% which is cost of equity
and WACC as well of TCS and growth rate (g) is the rate of return prevailing on 10 year
government bond i.e. @ 6.50%.

Terminal Value (growth in perpetuity approach)

(FCF2029 × (1 + g) ÷ (r – g)

we have taken 10-year government bond rate(g) 392860.737

6.50%

4. Discounting the cash flows to the present at the weighted average cost of capital:
We have discounted the terminal value of cash flows of next 10 years at a discount rate of
15.20% which is nothing but the cost of equity of the firm in the following manner:
 Terminal value= Rs.392860.737
___TV___
(1+r) n

Present Value
of Terminal Value TV / (1 + r)10
(PVTV) in million Rs.)

95436.35329
r = 15.20%
5. Calculating the firm value and interpreting results:

Equity
VALUE (in 488297.0903
million Rs.)
Shares
1,761.52
outstanding in current share price
(million) 495.40
Intrinsic
277.2021268
value
estimate

6. CONCLUSION:

As we have seen from the above analysis that Dabur India Ltd has Current share price
prevailing in the market of Rs. 495.40. Lower intrinsic value than its current market price, it
looks like a red flag that the stock is overvalued whereas the intrinsic value turn out to be Rs.
277.2021 which quite more than the current price which means that the company has been
overvalued while writing as its intrinsic value is less than current price.