Sustainable gains in revenue growth and margins likely

We find Dabur?s strategy to be in the right direction, expecting more sustainable gains going forward both on revenue growth and margins. We expect steady domestic volume growth of 8-10% supported by rural distribution enhancement initiatives and higher brand/new product investments. Margin recovery is on the way and Namaste operations would likely witness gradual recovery over FY14e (estimates). We estimate 17% EPS CAGR (earnings per share, compound annual growth rate) over FY12-15e and stay Overweight.

Valuation analysis: We maintain our March 2014 price target of R145. Our price target is based on one-year forward P/E (price-to-earnings) multiple of 24x (times). Our target multiple is in-line with the company?s past three year average P/E multiple. We believe recovery in volume growth and margins will allow it to register 15% sales and 18% EPS CAGR over FY12-15e warrants a higher multiple. The stock is currently trading at 26x FY14e P/E and 23x FY15e P/E which are amongst the lowest in our coverage.

Domestic revenue CAGR of 15% over FY12-15e: We estimate 15% domestic revenue CAGR over FY12-15e driven by 8-10% volume growth and 5-7% price/mix growth. Volume growth should be supported by enhanced distribution footprint, new product/brand launches and higher brand/media investments. CSD (canteen stores department of govt) channel sales (5-6% of domestic sales) have been quite weak in past few quarters and are likely to pick up in coming quarters, though at a modest pace. We discuss below category wise revenue growth trends and our expectations going forward.

Hair oils: After growth rates moderating in H1FY13 to 8-9% for Dabur owing to higher price competition in the Amla hair oil segment (from Marico?s Shanti Amla) and widening price differential in coconut oil (versus Marico?s Parachute), Dabur has stepped up its pace of investments, hiring some big celebrities to endorse the hair oil brands and is hopeful of recovery. We already saw growth rates picking up in Q3 to 12%. Dabur is also focusing on Almond hair oil?the recent launch has received good consumer response. We build in low double digit growth for hair oils in FY14e.

Shampoos: Dabur is adopting a herbal-based focus here to support growth rates. While Dabur has seen strong growth rates in shampoos over FY13, it is coming over a low base. We would expect growth rates to normalise to mid to high teens in FY14. Dabur commands 6% market share in this highly competitive category. But the category is a small contributor to overall revenues at just 3%.

Oral care: The category growth have been challenged in recent quarters. The lacklustre performance is largely on Babool, which has seen lower offtake. The mid/premium brands ? Red Toothpaste and Meswak ? continue to register double-digit growth. Competition in the toothpaste category remains stiff considering Colgate is trying hard to up-trade consumers in rural areas from economy brands to mid-price brands by offering low unit packs (at R10/R20). Colgate has been gaining share in toothpaste at consistent pace for past few years now. Tooth powder continues to remain under pressure. We expect high single digit growth rates for oral care in FY14e.

Health supplements: This has been a stronghold of Dabur where it has top 1 or 2 positions in each of the sub-segments (chyawanprash, glucose and honey). We expect Dabur to sustain 10% revenue growth in this category over FY14e supported by high single digit volume growth. While chyawanprash sales have suffered in recent quarter on account of weak CSD sales off-take, we would expect FY14 to fare better for this seasonal product.

Home care: Dabur has been registering healthy growth rates of 15-30% over the last five quarters for this segment. This category contributes nearly 3-4% of company revenues and Dabur intends to play in select sub-segments within mosquito repellents, air care and toilet cleaners. We believe Dabur can sustain high teens growth (led by volume growth) here as most of these categories are low penetrated nascent ones offering enough headroom for growth.

Skin care: This segment has registered healthy growth rates led by strong growth for Fem brand and steady growth rates for Gulabari. Dabur is focusing on playing in niche mass-mid segments and would do well to avoid a direct clash with the mainstream multinational players. We estimate mid to high teens revenue growth for this segment led by distribution gains (in Tier II, III and rural markets), new brand extensions/variants and higher marketing investments.

Foods: Juices (90% of Dabur?s food portfolio) have grown at a strong pace supported by constant innovation/renovation, growing penetration levels in this nascent category and enhanced distribution reach in semi-urban and affluent rural areas. Given moderation in growth for discretionary consumption in recent months we expect some rub-off impact on fruit juices too particularly for the Activ portfolio, which is priced at higher end. We estimate high teens growth for this segment in FY14e, moderating from 25%-27% levels seen over the last two years.

Overseas business: Organic business to register 15-20% growth: The organic international business, primarily consisting of sales in Middle East and Africa, has been one of the fastest growing for the company. Much of the gains in these markets have come from distribution expansion and new product introductions. We believe growth for organic business will sustain at mid to high teens. Margins for organic overseas business have expanded in Q3 helped by sharp increase in gross margins and we would expect them to sustain atcurrent levels.

Performance of recent acquisitions has been mixed. While Hobi has delivered decent growth, Namaste operations (which contribute 10% to consolidated revenue) have posted disappointing performance. Namaste has nearly completed the process of relaunching its key ORS brand and distribution restructuring in Africa. We believe the worst is probably behind for Namaste and expect gradual recovery in growth rates over FY14. We build in low double digit revenue growth for Namaste and high teens for Hobi for FY14e.

Modest margin expansion likely in FY14e: With some moderation in input cost inflation and high (advertisement & promotion) A&P/sales ratio already in the base, we expect Ebitda (earnings before interest, taxes, depreciation and amortisation). margins to move up 40 basis points year-on-year in FY14. While international business margins have recovered in the recent quarter, we would expect domestic margins to revive in the coming quarters.