12 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S Dabur India Limited | A N N U A L R E P O R T | 2003-04 13

2003-04 HAS BEEN A VERY GOOD year for

the Indian economy. After a relatively poor

GDP growth of 4 per cent in 2002-03, the

first quarter of 2003-04 showed a growth

of 5.7 per cent. Excellent monsoons

contributed to an even higher growth of 8.4

per cent in the second quarter. The monsoon

effect coupled with a distinct upswing in

manufacturing and services has further

increased GDP growth to 10.4 per cent in

the third quarter. Today, it is quite clear that

India will close 2003-04 by achieving a

growth of at least 8.1 per cent. This will not

only be the highest GDP growth achieved by

the country since the advent of economic

liberalisation, but also one of the highest

growth rates in the world. Chart A compares

overall GDP and sector-wise growth rates

between 2002-03 and 2003-04.

This impressive economic growth has

translated into a 6.6 per cent growth in per

capita real income for 2003-04 against a

1.8 per cent growth in 2002-03. Based on

this growth — especially coming as it has

with excellent agriculture — one would

have predicted high growth in the fast

moving consumer goods (FMCG) markets.

While some players such as Dabur India

Limited have achieved creditable top-line

growth, the overall industry-level growth

has been lower than what might have been

expected, given the economic performance

of the country. This requires some

explanation.

There are two hypotheses making the

rounds. According to one, the impressive

growth in GDP, as well as agricultural and

rural incomes, has occurred over the last

nine months, especially after the monsoons.

management discussion+ analysis

Posited by consumer goods companies that

are struggling to achieve low single-digit

growth, this theory suggests that it takes

two consecutive years of good or normal-

to-good monsoons to trigger a sustained

growth in agricultural and rural

consumption. Thus, substantial rise in rural

FMCG spends will occur only after this

year’s monsoons, provided the rains are

adequate between June and September.

The second hypothesis is based on

substitution. According to this theory, while

improved incomes promote wider use of

FMCG products, there is also greater

diversion of incremental personal

disposable incomes to “lifestyle” products

and services, such as entertainment and

consumer durables. In such a milieu of

substitution at the top-end, rapid and

sustained growth of core FMCG markets

requires more households to enter at the

bottom end. This requires sustained growth

in personal disposable incomes across a

wide strata of society, especially those in

the lower and lower-to-middle income

groups. Once again, the story veers to the

theme of “once is not enough” — namely,

that India needs more than one year of high

GDP growth for the core FMCG industry to

generate sustained double-digit top-line

growth.

Whatever the hypothesis, the data

reported by ORG MARG certainly shows

negative growth across the basic FMCG

segments where Dabur competes. Chart B

depicts the data.

Sluggish demand in 2003-04 has led to

intense competition in the sector. In many

segments, companies have resorted to price

wars to gain market share. For instance, in

shampoos, while value growth was a

negative 3.8 per cent (see Chart B), the ORG

data shows that volumes actually grew by

5.6 per cent. Similarly, in toothpastes, while

volumes decreased by 5.2 per cent, the

market shrunk by 12.4 per cent in terms of

value. In addition to this, regional players,

too, have offered lower priced products to

further increase the price competition.

Moreover, 2003-04 also witnessed

increases across a wide spectrum of raw

material prices. Rising oil prices created an

inflationary trend in most petrochemical

products like packaging material, which is

an important element of costs in the FMCG

segment. Higher energy prices also led to

increased freight — putting pressure on

costs of sourcing raw materials and

distributing final products. Therefore, most

companies in the FMCG segment had to

operate in challenging conditions of a

shrinking market with rising costs.

Dabur India Limited’s performance in

such an environment has been very

creditable. Through its strategic initiatives

and efficient execution, your company has

not only met the market challenges, but

also has registered a strong performance in

2003-04. The highlights of Dabur’s financial

performance during the year under review

are: (all figures are compared to

corresponding figures for Dabur (FMCG)

" Revenue from operations increased by 9.5

per cent from Rs.1048.5 crore for 2002-03

to Rs.1148 crore for 2003-04.

" Operating profit (PBDIT) increased by 24.1

per cent from Rs. 109.6 crore in 2002-03

to Rs. 136.1 crore in 2003-04

" Interest outgo decreased by 42.2 per cent

from Rs.11.9 crore in 2002-03 to Rs. 6.9

crore in 2003-04.

" Profit after tax (PAT) increased by 40.6 per

cent from Rs.72.0 crore in 2002-03 to

Rs.101.2 crore in 2003-04.

" Return on capital employed (ROCE)

increased from 27.2 per cent in 2002-03

to 34.9 per cent in 2003-04

" Return on net worth (RONW) increased

from 32.3 per cent in 2002-03 to 38.6 per

cent in 2003-04

Your Company’s creditable performance in

2003-04 can be attributed to its successful

positioning as an FMCG player leveraging

the herbal specialist platform — and shows

how successfully the management has

executed the strategic initiatives that were

introduced in the second half of 2002-03.

2003-04 was the first year of operation

for Dabur India Limited as a de-merged

FMCG entity. The de-merger was intended

to make the new organisation a focused

FMCG company, and so improve efficiencies

and return on assets.

If you will recollect, the Annual Report

for 2002-03 outlined several key initiatives

to drive your Company’s FMCG businesses.

To recapitulate:

" Dabur India Limited would drive higher

growth by drawing on its core strength of

being India’s most well recognised herbal

specialist company.

" The Company would focus on five key

brands — Dabur, Vatika, Anmol, Hajmola

and Real — and would back these up by

Your company has registered a strong performancein 2003-04 through its new initiatives and efficientexecution of strategies

14 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

new and innovative product launches,

stronger advertising and larger marketing

spends.

" The distribution network would be

substantially streamlined and

strengthened.

" Organisational changes would be

undertaken to drive efficiencies and

synergies across all FMCG brands.

We believe that your Company has

successfully implemented these initiatives

in its first year as a de-merged organisation.

This is borne out by the 9.5 per cent growth

in top-line; by a 24.1 per cent increase in

PBDIT; by a 40.6 per cent increase in PAT; by

major reduction in net working capital to

negative position; and by a 7.7 percentage

points increase in return on capital

employed (ROCE).

While your Company is upbeat with its

implementation successes in 2003-04, it

recognises that Dabur India Limited

operates in a very competitive environment

— one that will get even more competitive

in the years to come. To consistently

succeed, therefore, your Company will have

to explore new opportunities, especially

international businesses, and reinvent itself

on a continuous basis.

Going forward, Dabur India Limited

intends to grow by rejuvenating old

products, launching new products and, in

the coming years, by laying far greater

emphasis on exports. From a business point

of view, therefore, it is useful to examine

your Company’s activities in terms of its

domestic and international operations.

" Domestic businesses This constitutes the

Consumer Care Division (CCD), the

Consumer Healthcare Division (CHD) and

subsidiaries including Dabur Foods

Limited

" International operations These are carried

out by the umbrella subsidiary Dabur

International Limited and Dabur Nepal

Private Limited.

While the marketing functions are different

across the divisions and subsidiaries, there

is considerable integration in operational

functions of sourcing and supply chain

management. The salient features of the

consolidated financial performance of

Dabur India Limited.

" Consolidated sales from operations

increased by 12 per cent from Rs.1187.1

crore in 2002-03 to Rs.1329.6 in 2003-04

" Consolidated PAT (after accounting for

minority interest) increased by 36.7 per

cent from Rs.77.9 crore in 2002-03 to

Rs.106.5 crore in 2003-04

DOMESTIC BUSINESS

MARKETSConsumer Care Division (CCD)With your Company’s new exclusive

focus on the FMCG space, the erstwhile

personal care products division and the

healthcare products division have been

merged to form the Consumer Care Division

(CCD) — which deals with pure FMCG

products. The division’s portfolio includes

health supplements, digestives and

confectionery, oral care, hair care, and baby

and skin Care. Chart C gives the relative

sales composition for 2003-04.

CCD is the prime driver of Dabur’s growth

and contributes 84 per cent to Dabur’s total

domestic sales including foods. It succeeded

in overcoming the prevailing sluggish

market conditions, and registered an 11.5

per cent growth in sales from Rs.907.5 crore

in 2002-03 to Rs.1011.8 crore in 2003-04.

This sales growth has been coupled by

operational efficiencies — leading to a

growth in gross margins.

HAIR CARE

With a 37 per cent share, hair care is

the largest category in the CCD’s portfolio.

You Company’s entire hair care portfolio

grew by 4.7 per cent in 2003-04. This

growth was driven primarily by growth in

hair oils, while growth in shampoos

remained stagnant. The hair care segment is

a very competitive one and fierce price

wars, especially in the shampoo category,

are imminent. Going forward, Dabur will try

to shield itself from the price wars by

leveraging its herbal niche to build on the

brand loyalty it enjoys in this segment.

In hair oils, Dabur Amla Hair Oil, which

accounts for the lion’s share of your

Company’s hair oil sales recorded a

satisfactory 5.1 per cent growth in value

terms. Even more pleasing was the

performance of Vatika Hair oil — a coconut

based oil with added herbs — which grew by

an incredible 10.1 per cent in value terms.

The growth in Vatika Hair Oil was supported

by a new “Vatika Women” advertisement

campaign.

During the year under review, your

Dabur India Limited | A N N U A L R E P O R T | 2003-04 15

The de-merger was intended to make the neworganisation a focused FMCG company

Dabur India Limited | A N N U A L R E P O R T | 2003-04 1716 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

ORAL CARE

Dabur is primarily a player in tooth

powders, which accounts for around 21 per

cent of the aggregate oral care segment in

India. ORG-MARG data suggests that

toothpowder sales in the aggregate have

decreased by 8.1 per cent in the year under

review. Nevertheless, sales of Dabur Lal

Dant Manjan grew by 9.6 per cent in 2003-

04. Consequently, your Company has

succeeded in increasing its market share

from 28.5 per cent in 2002-03 to 29.9 per

cent in 2003-04.

We are now witnessing intense

competition in the oral care segment,

with the introduction of extremely

low priced toothpastes — which

are expected to transform

toothpowder users into

toothpaste users. Your

Company, however,

believes that

Company also introduced Anmol Sarso

Amla Hair oil. This oil, which is a non-sticky

combination of mustard oil with amla

extract, has been launched on the economy

platform.

ORG MARG data shows that the shampoo

market contracted by 3.8 per cent in value

terms in 2003-04. Dabur has not been able

to sufficiently insulate itself from this

downturn — while Vatika Anti-Dandruff

Shampoo recorded moderate growth, sales

of Vatika Henna Cream Conditioning

Shampoo were stagnant.

During 2003-04, your Company launched

the Anmol Natural Shine Shampoo, an

economy product for value conscious

consumers. Dabur believes that growth in

shampoos will occur at the economy-end of

the market — and this new product is

strategically positioned to drive growth in

this segment. Your Company has selected

the actress Rani Mukherjee as its brand

ambassador for hair care products.

HEALTH SUPPLEMENTS

Health supplements is the second largest

segment of the CCD’s portfolio and

accounts for 23 per cent of total CCD sales.

One of the major success stories of the

year was the new momentum to Dabur’s

flagship product, Chyawanprash. Driven by

a new contemporary packaging and an

aggressive advertising campaign featuring

Amitabh Bachchan as its brand ambassador,

sales of Chyawanprash grew by 8.5 per cent

in 2003-04 over sales in 2002-03. The ORG-

MARG data shows that Dabur

Chyawanprash has increased its market

share from 62.4 per cent in 2002-03 to 65.2

per cent in 2003-04.

Glucose D registered a 9.3 per cent

growth in the year under review and,

according to ORG-MARG data, increased its

market share from 12.5 per cent in 2002-03

to 14 per cent in 2003-04. Dabur Honey,

which is the largest Indian branded honey

in the organised sector, witnessed a

phenomenal 27.4 per cent growth in 2003-

04.

The success of these products has

translated into a 10.9 per cent growth in

the sales of health supplements in 2003-04.

DIGESTIVES AND CONFECTIONERY

According to ORG-MARG data, at the

all-India level, digestives witnessed a

negative 8.3 per cent growth in 2003-04.

Despite this gloomy scenario, your Company

has succeeded in growing the sales of

digestives and confectionery by 5.1 per cent

in 2003-04.

While the sales of Hajmola candy have

actually decreased in 2003-04, growth in

this sector has come from extension of the

Hajmola brand into new formats like

Anardana — which is the first ever branded

churan (digestive powder) — and launch of

new products like Hajmola Candy Fun2,

which is a unique candy having a fruity

crust and a spicy centre filling. Another new

product called Hajmola Mast Masala, a

tasty chat masala that also helps in

digestion is being test marketed in Kolkata.

All these new products have been well

received by consumers and should drive

growth in this segment in the coming years.

The company will focus on five key brands—Dabur,Vatika, Hajmola, Real and Anmol

18 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

of any given segment. It is also important to

note that in most products, barring a few,

Dabur’s market share is below 10 per cent

and there is considerable scope of growth

by capturing market share even if the sector

witnesses a downturn.

Consumer Healthcare Division(CHD)The consumer healthcare division of

your Company includes products of the

erstwhile Ayurvedic Specialists Division and

a set of over the counter (OTC) products

based on the ayurvedic medicinal platform.

The range of products offerings, which are

based on ‘grantha-based’ formulations, can

be broadly classified into OTCs, branded

ethical and generic products that include

Asavs, and classicals. The division is

supported continuously by in-house

research. There is also a tie-up with Shri

Dhanwantry Educational Society, which

owns and manages an ayurvedic hospital,

college and pharmacy in Chandigarh, for

assistance in research and clinical trials.

Sales of this division grew by 3.3 per cent

from Rs.82.6 crore in 2002-03 to Rs. 85.3

crore in 2003-04. Although, the CHD

accounts for about 7 per cent of Dabur’s

domestic sales including foods, this division,

with its healthy margins, is an important

element of Dabur’s product portfolio.

It is difficult to substantially grow in the

market dealing with ayurvedic medicines

prescribed by vaids and practitioners

certified as BAMS (Bachelor of Ayurvedic

Medical Sciences). For one, the ayurvedic

doctor community is shrinking; for another,

Dabur India Limited | A N N U A L R E P O R T | 2003-04 19

India is still immature in dental hygiene.

Almost a third of the population do not use

toothpowder or pastes but rely on

substances like ash and branches of neem

trees. As incomes rise, this section will

initially move to using toothpowder, even as

a section migrates from toothpowder to

toothpastes. Therefore, Dabur ought to

retain its prime position in the tooth

powder segment and, indeed, grow the

market.

Anticipating the dynamics of the oral

care segment, Dabur has forayed into the

toothpaste market with the launch of Dabur

Red toothpaste in April 2003. This

toothpaste, containing more than seven

herbs, has successfully captured more than

1 per cent of the overall market in its very

first year. Binaca portfolio comprising

toothbrushes grew by an impressive 13 per

cent during 2003-04.

BABY AND SKIN CARE

This segment accounts for only 7 per

cent of CCD’s sales. However, during the

year under review, it recorded one of the

highest segmental growth with a 21.6 per

cent increase in sales. In the baby massage

oil category, Dabur Lal Tail maintained its

leadership position, while Gulabari

maintained its strong growth momentum

with its skincare positioning. The Vatika

brand has been extended into the skin care

segment with the introduction of Vatika

Fairness Face Pack.

KEY INITIATIVES AND OUTLOOK

Two key initiatives undertaken in 2003-

04 were the further enhancement of the

new branding exercise and launch of

several strategically positioned new

products. The first major part of the

branding exercise was the repositioning of

the product Chyawanprash. Apart from

rejuvenating Chyawanprash as a product,

the repositioning was important to

revitalise the Dabur brand — which is

identified as the flagship brand of your

Company.

Since the product caters mainly to the

middle aged and older generations it was

imperative to have a universally popular yet

mature personality endorsing the brand.

Thus, Amitabh Bachchan was selected as

brand ambassador for Chyawanprash. This,

coupled with a packaging make over, has

given Chyawanprash a new life and in turn

rejuvenated Dabur as a brand. Such

exercises will be carried forward to other

brands.

In 2003-04, your Company recorded its

highest ever revenue from new product

launches in a single year. These new

products cover a wide range of segments,

and should provide Dabur India Limited

with the platforms for future growth.

Going forward we believe that the

industry will pick up with a lag. However

certain segments, like hair care and oral

care, will witness fierce price competition,

and growth will happen primarily in low

margin areas. Your Company has

anticipated this, and initiated its strategy of

spreading products across price and market

segments — thereby hedging downturn risks

Consumer Care Division succeeded in overcomingsluggish market conditions and registered agrowth of 11.5 per cent in sales

20

there is low brand loyalty, which results in

competition from several small and regional

players.

Therefore, your Company has identified

the OTC route as the high growth area. It is

important to note that growth in this

segment will happen with an increasing

faith in ayurveda as a proven alternative

form of treatment. The challenge is to

identify the right therapeutic areas —

common ailments like cough, cold and joint

pains, women’s health care and adjuvant

therapies for lifestyle related problems are

the initial choices — to develop

formulations, undertake clinical trials to

prove efficacy, and to successfully brand

these products and strengthen the OTC

route for their sales. The OTC products will

be advertised.

FOODS BUSINESS

Dabur Foods LimitedDabur Foods Limited (DFL), a wholly

owned subsidiary of Dabur India Limited,

markets natural fruit juices, ethnic cooking

pastes, sauces and tea. 2003-04 has been a

landmark year for this company. Not only

did sales grow by 24.2 per cent from Rs.69.1

crore in 2002-03 to Rs.85.8 crore in 2003-

04, but the Company recorded a positive

PAT of Rs.1.5 crore for the first time in its

short history.

During the year, sales of DFL’s flagship

product Real juices grew by 36 per cent.

Within this portfolio the “Activ” range grew

at a faster rate. In 2003-04, two new

flavours were added to the Real portfolio —

M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

Real Activ Carrot-Orange and Real

Cranberry. This now takes the number of

flavours under the Real brand to 12. DFL is

also in the process of launching Real juices

in 125 ml packs called “Real Junior”. This

product, which is being initially launched in

two flavours, is targeted at school-going

children.

In the Hommade range, coconut milk and

tomato puree did well. In order to leverage

its existing distribution network, DFL has

also started distributing Dilmah tea in India.

Dilmah, a Sri Lankan tea, is one of the

largest tea brands in the world.

A part of DFL’s growth strategy is to focus

on institutional sales. This is being adopted

for its key brand portfolios like Real,

Hommade, Lemoneez, and Capsico. DFL will

be launching large packs branded as

“Nature’s Best” to target institutional sales.

In 2004-05, DFL intends to grow through

new product offerings, sharpened

marketing strategy and more focused

advertising campaigns. Even more effort

will go into streamlining manufacturing

and procurement processes to improve

efficiencies and maintain margins in foods

— which is a very competitive, tight margin

environment.

INTERNATIONAL BUSINESS

As a conscious business strategy, your

Company has decided to enter the

international market more aggressively.

Dabur believes it is well positioned to

develop existing markets and enter newer

markets leveraging its herbal specialist

platform.

The first step in this direction was the

acquisition of Redrock Limited, an UAE-

based company through which Dabur

products were sold in the Middle East.

Acquiring Redrock has resulted in its

manufacturing facilities at the Jebel Ali

Export Processing Zone and Sharjah being

added to Dabur’s existing units in the sub-

continent. In addition, Redrock’s Middle-

Eastern rights on the brand Weikfield have

also transferred to your Company. The

acquired company has been renamed Dabur

International Limited, and is under the

charge of a new CEO — who, with a new,

dedicated team, will operate out of Dubai.

This new company has also taken charge of

Dabur Egypt Limited and its manufacturing

facility in Egypt.

Dabur International’s joint venture in

Bangladesh, called Asian Consumer Care

Private Limited, also became operational

during the course of the year. This venture,

which also has a manufacturing unit in

Dacca, launched Vatika Shampoo, Dabur

Amla Hair Oil and Vatika Hair Oil during

2003-04. Your Company expects the

Bangladesh market — with similar

preferences as in India for herbal products

— to be a growth driver in the future.

As a result of organic and inorganic

growth, international business, which

includes exports from India, contributed 9.6

per cent to your Company’s consolidated

sales. In 2004-05 it is expected that

international operations and overseas sales

will account for an even larger share of

Dabur’s overall sales and profits. Table 1

gives the relative contributions in the last

Dabur India Limited | A N N U A L R E P O R T | 2003-04 21

Your Company has identified the OTC route as thehigh growth area

22 Dabur India Limited | A N N U A L R E P O R T | 2003-04 23Dabur India Limited | A N N U A L R E P O R T | 2003-04M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

Uttaranchal. Both new plants — at Jammu

and Uttaranchal — will meet worldwide

standards of good manufacturing practices

(GMP) and hazard analysis and critical

control plant (HACCP). Also, the existing

unit at Katni (Madhya Pradesh) will be

upgraded during 2004-05.

Your Company has always given

considerable importance to improving the

productivity of its plants and production

process. This year, the focus was on

automation and de-bottlenecking of the

production process, backed by better

maintenance. Kaizen, implementation of

stringent wastage control norms and energy

audits at various plant locations constitute

some of the other initiatives taken during

the year.

As a result of these and other ongoing

initiatives, the operating profit margins of

the Company improved from 10 per cent in

2002-03 to 10.9 per cent in 2003-04.

Moreover, the cash overheads have

remained constant over the last two to

three years in spite of a significant increase

in the turnover. As can be inferred from

Chart D, productivity — defined as sales

turnover per employee — has increased by

over 9.0 per cent from Rs.33 lakh in 2002-

03 to Rs.36 lakh in 2003-04. Wastage on

the shop floor also improved by over 19.1

per cent in 2003-04 as compared to 2002-

03.

On the quality front, Dabur implemented

a decentralised structure by assigning its

production facilities and C&FAs to four

regional laboratories — all equipped with

new equipment of the latest technology,

and each supervised by a quality assurance

two years. While sales from international

grew from Rs.106.1 crore in 2002-03 to

Rs.128 crore in 2003-04, PAT from overseas

companies decreased from Rs.12.1 crore in

2002-03 to Rs.8.3 crore in 2003-04. This is

because Dabur has made new investments

into international companies, which need to

be turned around to reap more profits.

In order to aggressively target

international markets, Dabur International

has devised a multi-pronged strategy, which

varies from geography to geography. In the

Middle-East, it proposes to build and re-

build brands and customise products for

these markets. The focus on the Middle-

East, including Egypt, will be mostly Dabur’s

personal care brands. Bangladesh will be

catered to by both personal care and

healthcare brands. Dabur International sees

considerable opportunities in the CIS

countries, where the focus will be more on

healthcare products. Pakistan will be

personal care and healthcare.

2004-05 and the future will also see

Dabur International catering to the Asian

diaspora, and later to the mainstream

population, in the US, UK and Canada. There

are over 2 million Asians living in these

countries — and represent an excellent

market for Dabur’s herbal platforms in

healthcare. The company is already

negotiating with some US retailers to set up

“ethnic counters” for Dabur’s healthcare

products.

OPERATIONS

MANUFACTURINGYour Company has taken major initiatives

to upgrade manufacturing technology.

These initiatives include setting up of new

manufacturing facilities and upgrading of

existing units. Moreover, assets have been

put to maximum use so as to enable faster

turnover.

During the year under review, Dabur India

Limited commissioned a new production

facility at Jammu for manufacturing

personal care products. This exercise, which

involved both prefabricated and civil works,

was successfully completed in a record time

of six months. In addition, the facility at

Baddi (Himachal Pradesh) was also

expanded during 2003-04. This has

increased the percentage of consumer care

products manufactured by the Company,

which were earlier being out-sourced to

contract manufacturers.

The Company is also in the process of

commissioning another production unit in

Your Company has decided to enter the internationalmarket more aggressively, by leveraging its herbalspecialist platform

TABLE 1 RELATIVE SALES AND PROFITS OF

DABUR DOMESTIC AND OVERSEAS

2003-04 2002-03

DOMESTIC

Sales 1201.5 1081.0

% of Total 90.4 91.1

PAT 101.2 67.8

% of Total 92.4 84.9

OVERSEAS

Sales 128.0 106.1

% of Total 9.6 8.9

PAT 8.3 12.1

% of Total 7.6 15.1

head. This has made the system more

efficient and transparent, and the move is

already showing positive results. During

2003-04, product failures at the unit level

have been almost nil, and the rejection rate

at the consumer level has been as low as

0.3 parts per billion.

SUPPLY CHAIN MANAGEMENTYour Company has a very diverse supply

chain, as it handles an extremely wide

array of seasonal and non-seasonal raw

materials to produce and market over 600

SKUs through approximately 2,100

stockists. Dabur’s products cover over 6

lakh retail outlets — up from 5 lakh in

2002-03.

This year, as a part of its sourcing

strategy, the Company consolidated its

sourcing base for all group companies,

including its foreign operations, so as to

benefit from economies of scale. Also, by

hedging risks in the futures market for

important raw materials, the Company was

able to insulate itself from the highly

inflationary environment during the year.

As shown in Chart E, commodity prices

have risen significantly during 2003-04.

However, this did not have any negative

impact on the raw material spend. In spite

of the overall inflationary trend in the year,

cost of raw material as a percentage of

sales has come down from 44.9 per cent for

the FMCG business in 2002-03 to 43.8 per

cent in 2003-04.

During the year under review, the

Company has benefited significantly by the

success of the e-sourcing initiative taken in

the previous year with the support of

24 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

allow the management to focus on use of

information technology, rather than

managing it. It is a forward looking

initiative to ensure fast and effective

upgrading of technology to keep up with

latest developments, which will insulate the

Company from technological obsolescence.

As a part of this exercise, the Company is

in the process of implementing Hyperion —

a centralised data warehousing system for

its two ERPs. Besides the pure IT related

benefits, the Company will also benefit

from consultation and expertise on issues of

supply chain management and

Dabur India Limited | A N N U A L R E P O R T | 2003-04 25

FreeMarkets, a leading e-procurement

service provider. The Company procured

Rs.210 crore worth of raw materials

through e-sourcing, which accounts for

almost 50 per cent of its total raw material

spend. This initiative has brought in greater

transparency into the sourcing process and

resulted in substantial savings. Your

Company’s performance in sourcing was

also recognised by Indian Institute of

Materials Management, which awarded the

‘Chief Procurement Officer Award for 2003’

to Dabur’s Vice President–Supply

Management.

Encouraged by the success of its e-

sourcing initiative, the Company has

decided to implement the ‘Spend Visibility’

solution provided by FreeMarkets in 2004-

05. This will significantly improve the

quality of information available at an item-

wise level, allow better visibility of sourcing

priorities, and result in the formulation of a

more efficient and cost-effective sourcing

strategy.

On the sales and distribution side, Dabur

integrated its family care products division

and health care products division as a part

of its product portfolio restructuring

exercise during 2003-04. This was done

with a view to exploit the scale benefits and

synergies that existed between the two

businesses. More specifically, by eliminating

duplication of effort and increasing the

product basket, this has resulted in stronger

distributors with a greater reach, especially

in the rural markets.

Another major initiative taken by the

Company during the year was to reduce its

stocks at the stockists’ end, which involved

analysis and reassessment of their

requirements depending on their product

portfolio. As a result, pipelines have been

reduced considerably during the year. The

Company plans to continuously improve

this in the future.

Another initiative on the sales and

distribution side was the launch of ‘Dabur

My Page’ for online connectivity with the

top 500 stockists of the Company. This

system enables the stockists to check order

status, accounts statement and inventory

online, which makes distribution more

efficient and transparent. It has also

improved communication with the stockists

and simplified the management of

receivables. The Company expects to extend

this to other suppliers in the future.

Information TechnologyInformation technology has played a key

role in improving supply chain efficiencies

at Dabur. To leverage information

technology, your Company had successfully

implemented two ERP systems — Baan and

MfgPro — in production and distribution

respectively in the previous years. As

discussed earlier, the Company has also

gained substantially by its e-sourcing

initiative.

This year, your Company decided to out-

source its IT function, for which it has

entered into a 10-year IT outsourcing-cum-

consulting contract with Accenture. A

landmark exercise in ‘business

transformation out-sourcing (BTO)’, this will

enhance business performance through

proactive use of IT. It will be done by

leveraging existing infrastructure, and will

The e-sourcing initiative has brought ingreater transparency that has resulted insubstantial savings

Dabur India Limited | A N N U A L R E P O R T | 2003-04 2726 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

throughout the year and not even a single

day’s work was lost due to strikes or

disputes.

RESEARCH & DEVELOPMENTYour Company believes that research

and development is the key to innovation

and cornerstone of success. R&D has played

an important role in the developing of new

or improved products and processes. Dabur

Red Toothpaste, Vatika Fairness Face Pack,

Anmol Hair Oil and variants of Hajmola

candies, developed in-house by Dabur, were

very successful during the year under

review.

Several research initiatives during the

year were aimed at improving the quality

and appeal of the packaging of products

such as Dabur Chyawanprash and Dabur

Gripe Water. The Company also introduced

‘thermoform packaging’ for smaller packs of

products such as Lal Tail (Baby oil) and new

wrapping technology for square bottles

such as Dabur Honey.

Most of the research for new product

development for Dabur is done by the FMCG

wing of Dabur Research Foundation (DRF).

DRF has research and development facilities

of international standards for both

consumer care division (CCD) and consumer

healthcare division (CHD). The Company

expects significant benefits to accrue from

DRF in terms of quality research in the

future.

Dabur has also tied up with prestigious

ayurvedic and medical institutes such as

Dhanwantry Ayurvedic Hospital, Wardha

College, Poddar Institute and Benaras Hindu

University on matters related to research,

implementation of the Company’s strategy

as a part of this exercise.

Human Resources Dabur places great deal of confidence on

its excellent pool of human resources,

which it realises is the key to its future

growth strategy. The Company continued its

efforts to further align its HR policies,

processes and initiatives to meet the

business needs.

In line with its focus on international

operations, Dabur implemented a uniform

HR structure across all group companies

and operations. This will enable seamless

transition between domestic and overseas

positions. Also, the integration of the

personnel of the erstwhile Family Products

Division (FPD) and Health Care Products

Division (HCPD) was implemented

effectively to suit the business requirements

well within time. Major initiatives taken

during 2003-04 have been:

" Dabur implemented performance metrics

for all key positions based on two aspects

of the Balanced Scorecard approach —

Financial and Internal Business Process.

This approach clearly outlines the

expectations from each position, and will

be upgraded to include two more aspects

for key managerial positions in 2004-05.

" The Company institutionalised the

“Assessment & Development Centre”

(ADC) approach for all promotions from

staff to officer cadre and also at the senior

levels to objectively identify, develop and

promote the talent from within, and to

provide individual feedback for

development of the participating

employees. During the year, the Company

conducted four such ADCs.

" To encourage learning, your Company is

planning to set-up a learning centre,

which will be equipped with a library and

IT and web-based sources of knowledge.

The Company is also in the process of

setting up a knowledge management

portal and a leadership and capability

development cell.

" Dabur is committed to attract and nurture

fresh talent. Towards this end, your

Company recruited over 20 candidates

from leading management and

engineering institutes in the country, who

will be inducted into the Company

through the comprehensive management

training programme in 2004-05.

" In line with Dabur’s commitment to

ethical professional conduct, the

Company adopted a Code of Ethics and

Conduct, which will serve as a guideline

for our employees. In addition, to build

and strengthen a culture of transparency

and trust in the organisation, Dabur

introduced a Whistle Blower and

Protection Policy, encouraging not only

employees but also business associates to

report unethical business practices

without fear of reprisal.

As of 31 March 2004, Dabur has 1870

employees. Employee relations throughout

the year were supportive of business

performance across all the factories, with

significant improvements in the

productivity across all manufacturing units.

Industrial relations remained cordial

Dabur places great deal of confidence on itsexcellent human resources which, it realises, is thekey to its future growth

clinical trials and generating claims support

data.

ENVIRONMENTYour Company is committed to the well

being of the environment. The efforts

undertaken by Dabur India Limited in

managing and nurturing the environment

go much beyond the statutory requirements

stipulated by the central and state

governments. Substantial capital

investments have been made for effluent

treatment and air purification units in the

new plants located in Jammu and

Uttaranchal, which meet international

environmental standards.

In addition, efforts have been made to

tie-up with government and other agencies

to plant endangered species of plants and

herbs in herbal parks to prevent them from

extinction.

FINANCIALS

As you are aware, the Pharmaceutical

business of your Company was de-merged

and transferred to a new Company. This de-

merger was done with a view to provide the

two businesses—FMCG and

Pharmaceuticals—focus and resources to

pursue their own independent growth

strategies. 2003-04 was the first year of

operation of the businesses as separate

companies.

For the purpose of greater clarity and to

facilitate like-to-like comparison, we shall

analyse the financial performance of your

Company vis a vis the results of the FMCG

28 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

debt. These initiatives continued in the year

under review. Total debt of the Company

reduced to Rs.39.8 crore on 31 March 2004

compared with Rs.81.7 crore for the FMCG

business as on 31 March 2003.This has

significantly reduced interest payments

from Rs.11.9 crore in 2002-03 to Rs.6.9

crores in 2003-04 for the FMCG business—a

reduction of more than 42 per cent.

The strong top line growth coupled with

enhanced operational efficiencies has

translated into a healthy increase in profits.

Post tax profits (PAT) increased by 40.6 per

cent growth from Rs.72 crore in the FMCG

business in 2002-03 to Rs.101.2 crore in

2003-04.

A few of the salient features of the

Company’s financial performance are

highlighted below.

" Focussed improvements in supply chain

management has resulted in the company

working with negative working capital as

on 31 March 2004—the cash cycle has

reduced from 39 days in 2002-03 to minus

5 days in 2003-04

" All profitability ratios have improved.

EBIDTA margin (EBIDTA/Sales) improved

from 10.6 per cent in FMCG business and

11.1 per cent overall in 2002-03 to 12.0

per cent in 2003-04. The post tax profit

margin (PAT/Total income) increased from

6.8 per cent in FMCG business in 2002-03

to 8.8 per cent in 2003-04

" There has been a significant increase in

the Company’s return on capital employed

(ROCE), which increased from 27.2 per

cent in FMCG business in 2002-03 to 34.9

per cent in 2003-04. The Company has

been able to deliver better returns to its

shareholders in the form of higher return

on net worth (RONW), which grew from

32.3 per cent for the FMCG business and

20.8 per cent overall in 2002-03 to 38.6

per cent in 2003-04

Table 3 compares key financial ratios of

your company in 2003-04 as against

2002-03.

The de-merger has also considerably

reduced the Company’s risks associated

with financial gearing. The debt to equity

ratio—a measure of the gearing of the

Company—has reduced from 0.27 as on 31

March 2003 to 0.14 as on 31 March 2004.

The interest coverage ratio (ratio of profit

Dabur India Limited | A N N U A L R E P O R T | 2003-04 29

business of Dabur for 2002-03. Table 2

gives an overview of Dabur India Limited’s

financial performance in the year under

review.

Total revenue increased by 10.1 per cent

from Rs.1053.4 crore in 2002-03 to Rs.1159

crore in 2003-04. This top-line growth has

been backed by increase in efficiencies in

operations, which is reflected in a 24.1 per

cent increase in operating profit (PBDIT)

during 2003-04. Over the years, Dabur has

been taking steps to reduce its interest

outgo. These include securing low

cost debt by capitalising on

the Company’s strong

debt rating, as well as

retiring high cost

R & D has played an important role in developingof new products and processes

TABLE 2 DABUR INDIA LIMITED’SABRIDGED PROFIT & LOSS

STATEMENT FOR 2003-2004

(in Rs. Crore)

Dabur Dabur Dabur

03-04 02-03 02-03#

(FMCG) (FMCG)

Sales from operation 1148 1048.5 1232.3

Other income 11 4.9 8.3

Total Revenue 1159 1053.4 1240.6

Total Expenditure 1022.9 943.8 1105.9

Interest 6.9 11.9 17.1

Depreciation 15.7 17.7 22

PBDIT 136.1 109.6 134.7

PBIT 120.3 91.9 112.6

PBT 113.4 80 95.5

Current Tax 8.8 6.3 7.4

Deferred Tax 3.5 1.7 3

PAT 101.2 72 85.1

NOTE # Result includes both pharmaceutical and FMCG businesses

before interest and tax to interest

payments)—a measure of the Company’s

ability to pay interests through its profits—

has also improved significantly from 6.6 to

17.5 in the same period.

THREATS, RISKS ANDCONCERNSIn a year when India recorded one of its

highest GDP growth, the sluggish growth of

the FMCG sector is still a matter of concern

for us. The lack of significant expansion in

product categories, coupled with entry of

several smaller regional players, is

intensifying price competition, and

increasing pressure on margins.

There has been an upward trend in oil

prices and petroleum based products since

the latter half of 2003. This has resulted in

increased freight costs and costs of

petroleum based packaging materials. Since

freight and packaging constitute materially

significant proportions of Dabur’s costs, this

30 M A N A G E M E N T D I S C U S S I O N + A N A LY S I S

INTERNAL CONTROLS ANDTHEIR ADEQUACYDabur has a strong internal audit and

control system. PriceWaterhouse Coopers is

the internal auditor for the entire company

and its subsidiaries. The internal auditors

independently evaluate adequacy of

internal controls and concurrently audit the

majority of transactions in value

terms. The Company has an

independent Internal Audit

function staffed with qualified

and experienced people.

Independence of the audit and

compliance function is ensured

by the direct reporting of the

internal audit division to the

Audit Committee of the Board. For

the terms of reference of the Audit

Committee, refer to the section on

Corporate Governance of the Annual

Report.

CAUTIONARY STATEMENTStatements in this management

discussion and analysis describing the

Company’s objectives, projections,

estimates and expectations may be ‘forward

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

Company’s 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.

trend in high oil prices is a cause of

concern.

As a market leader in the Indian Ayurveda

and herbal products market, Dabur is also

concerned about the adverse impact that

counterfeit, spurious and low quality

products can have on credibility of this

entire industry, and hence its growth. Rapid

deforestation leading to erosion of certain

species of herbs, which form our raw

material base, is another element of risk.

OPPORTUNITIES ANDOUTLOOKDabur is aware of the risks and concerns

noted above and has devised its business

strategy accordingly. By increasing its

product portfolio, leveraging its brand value

as a herbal specialist and strategically

positioning its products, the Company

believes that it will largely de-risk itself

from pricing pressures and segmental

contractions.

Your Company believes monsoons will

continue to play an important role in the

growth of the Indian economy, particularly

in volume growths in the FMCG sector. The

consumption of consumer goods has

reached an inflexion point, and the sector is

at the cusp of significant growth. We are

cautiously optimistic of our prospects in

2004-05 and believe that a good monsoon

in 2004 will go a long way in stabilising our

growth path.

Dabur has tied up with prestigious ayurvedic andmedical institutes on matters related to researchand clinical trials

TABLE 3 KEY FINANCIAL RATIOS

Dabur Dabur Dabur

03-04 02-03 02-03#

(FMCG) (FMCG)

PBDIT*/Sales** 10.9% 10.0% 10.3%

PBIT/ Sales** 10.5% 8.8% 9.1%

PBT/Total income 9.9% 7.6% 7.7%

PAT/Total income 8.8% 6.8% 6.9%

ROCE 34.9% 27.7% 19.4%

RONW 38.6% 32.2% 20.7%

NOTE * In order to get a more accurate picture of theCompany’s operational performance, PBDIT has beencalculated net of “other income’’ | ** Sales fromoperations | # Result includes both pharmaceuticaland FMCG businesses

Dabur India Limited | A N N U A L R E P O R T | 2003-04 31