Dabur India: HOLD. Dabur India: Really pricey

Dabur India closed the 2014-15 fiscal with consolidated revenue growth of 11 per cent and profit growth of 17 per cent. Underlying volumes were also strong, holding above industry growth.

The company straddles a wide variety of categories and has a top-notch brand portfolio. It is ramping up its distribution network and can neatly capture a revival in urban consumer spending. But Dabur India’s many positives have already propelled its stock 49 per cent in the past year. Its trailing 12-month price-earnings multiple zoomed to 47 times from 37 times in July last year. The current valuation multiple is well above Dabur’s three-year average of 38 times, the BSE FMCG index’s 42 times.

Next, while the domestic FMCG market for Dabur is going strong, the international business is flagging due to muted performance of its Americas arm and currency disadvantage in regions such as Turkey. Global revenue accounts for a third of Dabur’s total. Besides, key segments hair care and oral care have seen growth slow with competition heating up.

Given these factors, investors can retain their holding in the stock, but avoid fresh exposures at these price levels.

Even with consumer spending subdued for the past several quarters, Dabur managed revenue growth (in domestic markets) of around 11-13 per cent for the past four quarters.

Underlying volume growth has also been strong at 7-8 per cent, indicating that the company isn’t heavily dependent on price hikes to drive sales, unlike many peers.

With input prices correcting, companies may henceforth find it hard to raise product prices.

Dabur’s resilience came about thanks to its niche presence, its positioning on the ayurvedic platform, and diversified product basket. In foods, for instance, it operates in the relatively under-penetrated and high-growth fruit juices and culinary aids.

The foods category clocked growth in excess of 15 per cent for the past few years. Similarly, its health supplements category with brands such as Chyawanprash and Dabur Honey managed double-digit sales growth.

But other categories — hair care, skin care, and oral care — faltered. Hair-care, the largest contributor to domestic revenue at 23 per cent slowed to single-digit sales growth much of the time since the September 2013 quarter. Heated competition hurt here; hair oils, for instance, saw new entrants such as L’Oreal and Hindustan Unilever. Oral care is another intensely competitive category.

The lower growth relative to other categories is likely to persist, given that personal care as a whole offers higher margins for most FMCG players and thus their focus lies there.

Dabur’s global markets grew less than 10 per cent for the past three quarters. That’s sharply down from the 18-19 per cent in the quarters before. Price correction of around 7 to 8 per cent taken in its Namaste business in order to boost sales was responsible for the slowdown. Demand has improved in the past couple of quarters, but whether this sustains, remains to be seen. Further, a stronger rupee hit growth in regions such as Nigeria, Turkey, and Egypt, and may remain a drag on consolidated numbers.

Dabur has a diverse raw material basket. So, some inputs turning cheaper was offset by others becoming pricier. For example, prices of inputs such as gold and crude oil derivatives corrected. But inputs such as coconut oil and those used in health supplements moved higher.

The company saw its raw material to sales ratio drop a shade to 47.7 per cent for 2014-15 compared with 48.2 per cent the year before. The company used these savings to step up advertising and promotion for new launches and to push its rural sales. At 14 per cent, Dabur’s adspend to sales ratio is among the higher ones in the listed FMCG space.

Operating profit margin therefore didn’t move much, holding at 16.8 per cent for 2014-15 against the 16.4 per cent the year before. Prices of materials such as fruits and oils may remain on the higher side. Therefore, significant margin improvement may not come about.

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