Long term intact in spite of a soft Q3: Dabur has corrected roughly 12% from peak due to concerns on rural slowdown, late winter and the recent upheaval in Turkish lira. While Q3FY22 will be impacted due to these factors, especially given a very high base of 18% volume growth, we expect Q4FY22 to benefit from: i) immunity products to see a spike due to rising Covid wave 3; ii) harsh winter has finally set in spurring sales of winter products. Maintain ‘BUY’ with a TP of Rs 720 on: i) healthy recovery in demand for juices and out-of-home products; ii) strategy of replicating naturals’ template to shampoos from toothpaste; iii) market share gains across portfolio; iv) impressive innovation funnel; and v) growing e-commerce play (7% of business).
Why has Dabur stock corrected 12% from Top? Winter this year (Q3FY22) has been delayed, particularly in north India. A delayed winter adversely impacts skin care and Chyawanprash. In Q3FY22, Dabur has a high base of 18% volume growth. The Turkish lira has fallen off sharply over the past few months, and this will impact Dabur too. Rural slowdown is likely to impact all FMCG companies in Q3FY22.
What are the triggers? In our view, near-term concerns are factored in. Immunity products are likely to fare better in Q4FY22 due to rising Wave 3 of Covid. Dabur has been among top tier by volume growth and EBITDA margin resilience for the past few quarters. The company is now taking its toothpaste playbook to herbal shampoo. Dabur has made rapid strides in toothpaste from a top 2 player in the past few years and could soon become the number two player in toothpaste after Colgate. Dabur gets 55% of its sales from urban areas. Urban FMCG demand is beginning to improve and could help in fighting rural slowdown. Modern trade could further revive in FY23 (blip likely in near term due wave 3). Modern trade recovery bodes well for discretionary segments aided by activations at stores.
Outlook and valuation: Salubrious growth in the offing; retain ‘BUY’ Though rural growth and high base of 18% volume in Q3FY22 are a cause for concern, the two-year CAGR would be decent. Health and immunity-based products could see a temporary spike in Q4FY22. Since the company derives 55% of India business from urban areas, demand in the food, beverage, personal care, skin and salon segments would remain decent. Dabur has seen share expansion across many segments: toothpaste (40bps), hair oils (80bps), Chyawanprash (520bps), honey (430bps), Odomos (120bps), Odonil (210bps), Real brand (100bps) and shampoo (30bps). As much as 95% of the company’s portfolio has gained market share. Currency volatility in international business, particularly Turkey, is a key risk. Reiterate ‘BUY/SO’ with a TP of Rs 720.