Increased focus on natural products and expansion of distribution network boost Dabur’s prospects
Action: Cut FY16F/FY17F earnings by ~4.5%, increase TP (target price) to Rs 312 and maintain Buy We cut our FY16F and FY17F earnings by 4.0% and 4.4%, respectively, we expect the slowdown in consumption to result in revenue growth of 10% and 16% y-o-y, compared to our earlier estimates of ~18%. However, we increase our TP to Rs 312 as we roll forward by two quarters. We maintain our Buy rating on the stock given the company’s increased focus on natural products in its portfolio and expansion of its distribution network.
Catalysts: Expected pick-up in consumption, increased focus on natural products and expansion of distribution network
We expect growth rates to pick up in both urban and rural consumption into FY17F, and believe Dabur India will be a key beneficiary of this up-tick given its product portfolio and distribution network. The company is strategically positioning itself as a natural product brand and has new products in its innovation pipeline as well. Its distribution network now reaches 5.3mn outlets due to its increased focus through its outreach programmes. We expect margins to stabilise at ~18% in the medium to long terms given the continued softness in input prices.
Valuation: Stock is trading at 31.3x FY17F EPS
The stock is currently trading at 31.3x FY17F EPS (earnings per share) and 28.8x 1 year forward EPS of R9.7. We maintain our Buy rating and increase our TP to R312 from R296. While we have roll-forwarded our time frame by two quarters to the average of FY17F and FY18F earnings, our cut in estimates for FY17F causes the change to be ~5%. We retain our target multiple of 32x, similar to other mid-cap names in our coverage universe.
A well-diversified portfolio
Dabur has a revenue portfolio that is spread across three main verticals— healthcare comprising health supplements, digestives and over the counter (OTC) products, HPC comprising skin care, oral care, home care and health care and foods. The healthcare, HPC and foods segments contribute ~33%, ~48% and ~19% to overall domestic business revenues, respectively. The company has over 11 brands with a turnover of over R1 bn, and three brands with turnover of more than R10 bn. We consider this diversified portfolio to be a key strength of the company.
Consistent performance over the last few years
We continue to like Dabur India for its consistency among HPC companies under our coverage. It has managed to remain largely insulated from most of the slowdown in the consumption cycle. On the revenue front, revenue growth for the company has been stable in the range of 9-17% for the last few quarters, while other HPC companies report larger deviations. Emami (HMN IN, Neutral) reported revenue growth of -1% in March 2014, followed by a rise of 26% in the next quarter. Growth for Colgate Palmolive (CLGT IN, Reduce) is stable but has fallen sharply in the last two quarters.
Leads competition across most verticals
Dabur India demonstrates strong leadership across segments such as digestives, home care and juices, which we believe is due to its distinctive product portfolio, wide distribution network (5.3mn outlets) and brand positioning. The company was successfully able to position honey as a food product, thus leading to a market share of over 75% in the branded honey market. Apart from this, its products Dabur Chyawanprash and Hajmola are the largest selling Ayurvedic medicine and digestive tablets with over 65% market share in both categories.
The company has recently gained share in the oral care space with consumers increasingly opting for traditional herbal-based toothpastes.
Key drivers for growth
Dabur India boasts that health and well-being are the underlying themes across its portfolio—a key positive in today’s environment, in our view. Products such as Dabur Chywanprash and Honey in supplements, Pudin Hara and Hajmola in Digestives and their OTC products offer consumers the opportunity to buy branded products with natural benefits.
The company has continued to stress this aspect of its portfolio. Several of its new launches reflect this— it has recently launched Dabur Stresscom which are basically Ashwagandha capsules that can be used to relieve stress, strain and fatigue. Within its foods portfolio, the company recently launched Real Activ Juices for a healthy life and continues to extend this theme into other products.
Expansion in distribution
The company has always made efforts to expand its distribution reach, especially in rural markets. They have done this through three major programmes—Project Double, Project 50-50 and Project CORE
Innovation—Stepping it up
Recent innovations in its beauty and personal care portfolio include using almonds in its shampoos and oxygen in facial care products. Apart from this, it has introduced new products overall such as hair masks and sun lotions. The company is also targeting several youth-centric products and categories such as milkshakes and yoghurt.