Dabur’s Q4 results showed strong and resilient growth in oral care, despite Patanjali making significant gains in its toothpaste portfolio. However, the health supplement business continues to be drag due to competition from Patanjali. Dabur’s investment case will be driven by how successfully it executes its product launches, regains momentum in its health supplement portfolio, and makes its premiumisation strategy work, but its long-term investment case should continue to be shadowed by the risk of whether Patanjali competition can spread to the significant parts of its portfolio. We believe Dabur’s aim to maximise revenue growth in FY17e and keep margins stable is a sensible strategy. Volume growth acceleration across its key categories should be a key catalyst for the stock’s performance.
Almost in-line set of results: Dabur’s Q4 revenue and PAT grew at c11% and c16.6%, and both were ahead of Bloomberg consensus. Domestic FMCG business grew by 8.5% y-o-y buttressed by 7% volume growth, which was quite respectable considering that the quarter has still one month of supply disruption in fruit juices. International business CC growth was 10.4% while reported growth was 15.7%. Organic international business grew by 19.3%.
Where the results stand out: (i) toothpaste growth at 20.3% y-o-y is quite strong, led by Red toothpaste (double digit volume-led growth reflecting increasing consumer preference for Ayurvedic toothpaste) and Meswak (double-digit growth driven by product efficacy), while Babool performance remained subdued; (ii) hair oil business growth of c8.2% y-o-y was driven by double digit growth in the perfumed hair oil category; (iii) home care business growth of 19.3% y-o-y was driven by growth in Odonil and Odomos brands.
Where the results are below expectations: (i) health supplements business grew by single digit as honey faced competitive intensity from Patanjali; (ii) digestive performance was weak with sales growth of 6.5% as Hajmola growth was impacted due to increased competition from local players ; (iii) skin care business performance was subdued as bleach portfolio was flattish due to an adverse base.
Outlook: In FY17, Dabur expects the second half to be better than the first half. We raise our TP to R270 from R260 due to changes in our forecasts and rolling forward our valuation.
Key points from conference call
Consumer demand: Dabur doesn’t expect a change in the demand environment in the next couple of quarters but hopes for a better second half if the monsoon turns out to be normal. Focus for FY17 will be to maximise revenue growth led by volumes, backed up by new product launches and A&P spends. It rules out any material price increases soon and will rely on premiumisation of part of the portfolio to aid revenue growth.
Foods: Revenue growth in Foods portfolio came back as the supply disruption from Nepal came to an end from February and growth should attain normalcy.
Oral care: Oral care continues to register an impressive growth trajectory, led by growth in Red toothpaste and Meswak. Its toothpaste portfolio grew by 20.3% in Q4, which is impressive since Patanjali’s exponential growth in toothpaste appears to be a formidable threat.
Hair care: Hair oils registered 8.2% y-o-y growth with both perfumed and coconut oil performing well. Shampoo portfolio was under pressure due to increased competitive intensity.
Health supplements: Patanjali has become a formidable competition in this segment, taking market share in the honey segment due to significant price differential. Dabur aims to compete by launching premium variants of honey with new flavours and valueadd, which is a sensible strategy. In the Chyawanprash segment, Patanjali’s threat is real; however, Dabur believes that Patanjali has been instrumental in bringing new users to the category and eventually Dabur should also stand to benefit.
OTC and Ethical focus: OTC & Ethical portfolio grew by 7.1% and Dabur is augmenting its focus on this portfolio through project LEAD. Demand generated by doctors’advocacy is a key focus.
Innovation: Dabur launched new products, namely Dabur Honey Squeezy, Glucose Aam Panna and Pudin Hara Antacid in India, and Amla Men Hair Tonic, Dermoviva Face Wash and Dermoviva Baby Wipes in international markets, which will help generate growth momentum.
International business: Dabur aims to raise Namaste’s revenue to close to $100m in FY17 and increase its Ebitda margins to high-single digit from mid-single digit at present. It hopes to achieve double-digit margins once the revenue scale reaches c$110m and it brings local manufacturing to Africa. It is facing significant challenges on margins in Turkey due to currency depreciation, but CC growth in Egypt is impressive at 27% y-o-y.
We marginally revise our estimates post Q4 results. We keep FY17-18e earnings almost unchanged, but increase FY19 earnings estimates by c1%. We also roll forward our fair value estimate from January 2016 to April 2016. On the back of these estimate changes, we raise our TP to Rs 270 from Rs 260.