Dabur has consistently outperformed peers such as Hindustan Unilever (Reduce) on volume growth over the past few quarters. We believe Dabur’s outperformance will continue over the rest of FY15F (forecast). Urban growth is picking up and Dabur’s portfolio appears well-positioned to benefit from this uptick over the next year. Over the long term, we like Dabur’s positioning as a profitable operator in multiple segments, which we believe lessens the risk of it from being leveraged to a single segment or product.
The company has strong positioning across several categories and is also the market leader in some high-growth segments such as juices, as per the management. Over the long term, this has allowed Dabur to deliver a much more consistent performance than some of its mid-cap peers, which we believe will continue to be the case going forward. We raise our target multiple from 29x to 32x, in line with other mid-cap consumer companies, which moves our TP (target price) to R296—implying 15.5% upside from current levels.
Better volume growth vs. peers: We see two key catalysts for the stock in the near term. First, continued strong volume growth delivery, and second, improvement in Ebitda margins over the next few quarters. We believe Dabur has consistently been able to deliver on both parameters, which underscores our long-term positive stance.
Valuation: Dabur trades at 27.7x FY17F EPS (earnings per share) vs. the sector average of 31.6x, HUL at 40.8x and Colgate (Reduce) at 35.2x. Given the consistent delivery of growth, the valuation discount vs. the sector is unwarranted, in our view. We expect the stock to outperform the sector over the next year. Dabur is one of our conviction Buy ideas in the mid-cap space within the sector.
Q3 results: a good set of numbers
Results were in line with our and consensus estimates. While sales were 4.5% below our estimates, PAT (profit after tax) came in 1.4% above our and 0.6% below consensus projections.
* Net sales rose 8.9% to R20.74 bn against our expectation of R21.7 bn and consensus at R21.5 bn.
* Consumer care business revenues increased 7.7% year-on-year (includes International Business), while foods business registered 13.4% y-o-y growth.
* Ebitda (earnings before interest, taxes, depreciation and amortisation) came in at R3.46 bn vs our forecast of R3.49 bn and consensus at R53 bn.
* Consolidated gross margin improved 100 basis points to 52.3% vs our estimate of 120bps y-o-y decline.
* Ebitda margin came in at 16.7%, up 130bps y-o-y. We were expecting Ebitda margins at 16.1%.
* Key surprises were: other expenses (11.7% vs estimate of 13.5%); however, A&P (advertising, marketing & promotion) was higher at 15.4%.
* PAT came in at R2.8 bn against our estimate of R2.79 bn.
Conference call: key takeaways
Growth: In Q3FY15, Dabur saw rural growth rise faster than urban growth. However, management does not see this as an indicative trend and going forward expects more even growth in both channels. Overall volume trajectory remains relatively stable.
Volume growth: In the near term, management believes volume growth is likely to at 6-10%.
Input costs: Lower input costs is yet to fully show up in gross margins, but the next two quarters should show improvement. Decline in oil cost, a positive for gross margins, to sustain for the next few quarters. Agri-based commodities have not yet seen a strong price correction, and gross margins to continue moving higher.
Food business: Over the next year, the foods business should deliver 15% growth. This quarter’s performance was affected by last year’s high base, which should continue to play a part in the growth rate over the next year.
Pricing: The management acknowledged that here will be some corrections in pricing in parts of the portfolio, but overall does not see a need for strong correction in pricing across the portfolio.
Dabur: among the most consistent in the sector
Over the past few years, Dabur has been one of the most consistent companies in the sector and has managed to remain largely insulated from most of the slowdown in the consumption cycle.
Starting from June 2011, (i.e, the last 14 quarters), consumer staple companies have witnessed a slowdown in volume growth from a peak of 11% to 5.6%, a 5.4 ppts (percentage points) variation. Dabur has witnessed a peak of 12% and a bottom of 8.3%, a variation of just 3.7ppts. Individually, peers like Marico have witnessed their net profits fluctuate even more wildly from a peak of 16% to a bottom of 3%, while, Colgate-Palmolive has seen a peak of 20% and a bottom of 5%.
A well-diversified portfolio augers well: We believe Dabur’s steady performance, even in the most turbulent times, puts it well ahead of peers and is a result of its well-diversified product portfolio. The uniqueness of Dabur’s portfolio is that aside from its international business, no other segment accounts for more than 15% of its revenues. This is despite Dabur having strong leadership across segments like digestives, home care & juices.