Dabur’s solid performance augurs well, maintain ‘buy’

We reaffirm our ‘buy’ rating on Dabur India with an increased target price of R152 (earlier R132) as we roll forward our valuations to FY15f.

Our target multiple remains unchanged at 25x one-year forward earnings. This is a marginal premium to the sector average of 24x, which we believe is justified as Dabur offers significant portfolio de-risking compared to mid-cap peers. Improving volume growth trajectory and attractive valuations are likely to be positive triggers. If we look at the one-year forward P/E for Dabur, we see a correction in valuations of late. This is justified as the company was passing through a transition phase.

But with growth now back on track, we see valuations converging to Marico’s levels over the near to medium term. We would be buyers at current levels. Dabur currently trades at a 7% discount to mid-cap peer Marico for a similar earnings growth profile over the next couple of years. There is upside surprise potential at Dabur if volume growth continues to be close to double digits. Our margin assumptions are conservative at 20 bps improvement each year, which could surprise on the upside.

Marico, Emami and Godrej Consumer have all been able to deliver low double-digit volume growth over the past few quarters, while Dabur’s performance has lagged. Marico has delivered consistent 13% organic volume growth over the past 4-5 quarters, while Godrej has fared similarly across the two large portions of its portfolio — soaps and household insecticides. Emami, too, has been able to deliver strong performance

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