Dabur has returned 28.1% in the past three months, re-rating from 26.5x to 33.7x FY18e forward consensus PE (price-to-earnings ratio). Meanwhile, consensus earnings estimates did not change in this period. We believe the stock had de-rated on fear of price competition from Patanjali and is now building in little to no impact from Patanjali’s extraordinary growth. Dabur has reiterated its commitment to reinventing its herbal legacy and positioning, as well as to launching premium products.
Reasons for stock performa-nce; highlighting negative catalysts ahead
There were other reasons for the good stock performance, such as expectations of a good monsoon, which could aid volume growth (given higher exposure to rural consumers). Also, Dabur’s Q2-Q3 FY16 were weak, given the disruption in the juice business; therefore, we expect seemingly stronger numbers due to the weak base. Near-term risks and downside for the stock could come from: a weak Q1FY17 (drought-like conditions in April-May 2016); intensifying competition in the herbal space; new launches from Colgate that may disrupt Dabur’s herbal toothpaste; and Patanjali possibly competing in more segments and Dabur’s pricing power getting capped in Chyawanprash and Honey due to ongoing promotions.
Core thesis intact; execution on new products bears watching
Dabur enjoys some of the best herbal/Ayurvedic positioning among personal care and healthcare companies in India. To compensate for its slowing healthcare segment, we estimate hair care, oral care and food will gear up with an innovative new launch pipeline and promotions. We will be watching the new product pipeline across segments, especially in healthcare/OTC, which have potential to create new revenue streams in far less competitive segments (i.e, Honitus from Dabur).
Valuation: Increasing PT to Rs 335; maintain Neutral
We are raising our price target to Rs 335 from Rs 280, rolling forward our target to FY18e from FY17e. We derive our price target using three-stage DCF methodology, with 11% WACC and a 5% terminal growth rate (both unchanged). At our previous PT, Dabur traded at 33x FY17e; it will trade at the same level at our new PT, a 10% discount to the HPC universe PE, primarily due to risk associated with competition in the herbal space from existing players and newcomers.
We believe the market is overlooking the potential risks to the company’s earnings, since competition is intensifying in the herbal space, with established players and new entrants aggressively looking to break through. We highlight a few challenges: In the toothpaste business, current market leader Colgate-Palmolive India has increased its focus on herbal offerings. Its recent Q4 investor presentation indicated more offerings are in the pipeline for the company.
These launches could impact Dabur’s Red toothpaste volume growth trajectory. In the honey business, the company has admittedly lost share to Patanjali. We think it could be difficult for the company to gain back the market share, given the pricing differential of the two products. Dabur’s honey retails at a 46% premium to Patanjali’s and recently offered a 20% consumer promotion to prevent further share loss. We believe Dabur could face pricing issues in its Honey and Chyawanprash portfolios (i.e., 25% of domestic business profit), which could pose a problem if there is strong commodity price inflation going forward—we’re not building this into our base-case estimates yet but highlight it as a potential downside risk. However, we believe the stock could remain resilient in the near term, given: Positive sentiment surrounding the stock and the market’s expectations of management delivering in the herbal space with a position of ‘science-backed Ayurveda’; a very low base, given the disruption in the fruit juice segment because of the India-Nepal border issue in the base quarters (Q2-Q3 FY16); good volume growth overall and reasonable pricing power, given a strong herbal platform and positioning across brands.
Stock price movement
The stock has moved +28.1% in the past 3 months, from a FY18e forward consensus PE of 26.5x to 33.7x. However consensus earnings estimates haven’t moved significantly over the same period. This indicates a re-rating of the stock. This is further substantiated by the fact that currently, long-term growth expectations for the company are at a five-year high.
Valuation Method and Risk Statement
We believe the key risk to Dabur is the limited appeal of traditional Ayurvedic products as consumer lifestyles change. Another risk is low tax rates because of factory locations in areas that are designated as tax benefit zones; any change in this law could affect earnings, in our view. We derive our price target from a three-stage DCF using 11% WACC and 5% terminal growth rate.