'Buy' rating on Dabur India shares, target Rs 170: Citigroup

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SummaryWe maintain our 'buy' rating on Dabur India as supply chain and product initiatives are beginning to bear fruit.

Citigroup

We maintain our ‘buy’ rating on Dabur India as supply chain and product initiatives are beginning to bear fruit.

We increase target price to Rs170 (Rs150 earlier), which is based on 28x Q3FY14e consolidated EPS. Over the past five years, the stock has traded between 12 and 34x one-year forward earnings, with its historical average being ~25-26x.

Our target multiple is at a slight premium to the stock’s past five-year average given the healthy business prospects in the near to medium term. Our multiple is slightly lower than what we ascribe to peers given its higher proportion of earnings from developed markets.

For Dabur, we expect a strong 21% EPS CAGR over FY13-15e as initiatives around distribution reorganisation, increased reach and product innovations/renovations will likely support volume growth and mix improvement. The stock has modestly outperformed peers by 4% YTD, which will continue as the valuation gap further narrows given the outlook. Dabur remains one of our top picks, marginally raise estimates by 1-2%.

Volume growth has moved up to 12% — the highest in 11 quarters and at the upper end of management guidance of 8-12%. This validates our thesis that benefits arising out of Project Double and Project Speed should now start bearing fruit. More than just the quantitative increase in distribution (rural outlets doubled, overall reach increased by ~10% in two years), we think qualitative improvement (wider portfolio available in rural India, lower dependence on wholesalers) is key, and will positively impact rural mix and margin profile.

Dabur's revenues rose 12% y-o-y to Rs1,530 crore — a tad lower than forecasts as the non-core guar gum exports declined, even though domestic (up 15%) and international FMCG (up 12%) did well.

Lower ad spends (up 5% y-o-y, but down 80 bps) led to a better than expected margin gains and in-line profits. PAT of R200 crore rose a healthy 18% y-o-y. The working capital cycle and FCFs have improved in FY13. Dabur's management is more confident of achieving the upper end of its volume growth guidance, given its supply chain initiatives and product innovation pipeline (the management is looking for adjacency in existing categories — fruit juice/dairy combinations, toothpastes, OTC, and so on).

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