Firm Calls: Dabur India - Growing naturally

Having put behind it the fallout from demonetisation and GST, this FMCG major is poised for good growth

Increasing consumer preference for ayurvedic, natural and herbal products, improving rural demand and receding headwinds in the international business make a case for an investment in the Dabur stock. With the hiccups from demonetisation and the GST transition behind it, the company is well-poised to see steady growth in volumes in the quarters to come.

Market share gains in segments such as oral care and juices as well as a slew of launches across verticals hold promise. Valuations too seem attractive in comparison with peers. Dabur currently trades at 48 times its trailing 12-month consolidated earnings. This is at a discount to Hindustan Unilever (61 times), Marico (52 times ) and Godrej Consumer (50 times).

Betting on rural demand



Dabur has a wide product portfolio straddling segments such as home care (Odomos, Odonil, Sanifresh) personal care ( Vatika , Babool, Meswak, Gulabari, etc), healthcare (Chyawanprash, Honey, Pudin Hara, Hajmola, etc) and foods (Real, Activ). While home and personal care products bring in half the revenues, the healthcare segment chips in with 30 per cent. Foods bring in the rest. In the last year, the company has been quick to recover from the impact of demonetisation and the transition to GST.

While domestic volumes dropped by over 5 per cent in the quarter ended December 2016 (over the December 2015 quarter), it recovered to show a 2.4 per cent year-on-year growth in the March 2017 quarter.

Similarly, volume growth, which dropped by 4.4 per cent in the three months ended June 2017, ahead of the GST implementation on July 1, picked up in July-September, moving up by 7.2 per cent.

Dabur should continue to show good traction in domestic volumes. For one, rural demand is expected to gain strength. Although there has been divergence in the impact of monsoons and crop yields across the country this year, an expected increase in rural spending by the government ahead of the Assembly and general elections will be the growth driver in 2018. The company has significant exposure to rural areas, from where it derives 45-50 per cent of revenues. It has recently set up a new sales structure, putting more feet on the ground in rural India.

Increasing interest



With consumers showing greater interest in ayurvedic, natural and herbal products, Dabur is on a strong wicket on this front too. For instance, in the oral care space, herbal/ayurvedic toothpaste now constitutes 20-25 per cent of the total market. With offerings such as Red, Babool and Meswak toothpastes, Dabur has seen good traction in sales, even as competitor Colgate has been struggling. Dabur’s oral care segment has shown a revenue growth of 9-23 per cent in the last three quarters post demonetisation, while Colgate’s growth has been muted at 2-3 per cent. The recent launch of the Red Gel has been well-received. Another launch is on the cards in the fourth quarter.

Despite stiff competition from Patanjali in honey and chayawanprash, Dabur remains the market leader in this segment with 50-60 per cent share. In the latest September 2017 quarter, Dabur Honey posted 8.6 per cent revenue growth, reversing the declining trend of the previous quarters. The company has also strengthened its hair oils portfolio with the recent launch of the Vatika Satt Poshan, Anmol Jasmine Hair Oil and Vatika Enriched Coconut Hair oil , which is directed at countering hair fall.

Recently, the company has tied up with Amazon to increase the online reach for its ayurvedic products across the globe. Apart from its existing products, Dabur will also offer an exclusive range especially tailored for Amazon’s global customers. Thanks to this, the contribution from e-commerce, which is 2.5 per cent of domestic sales and 1 per cent of consolidated sales now, is expected to increase.

International business



The coming months should also see the company’s international business performing better. Global business brings in about 30 per cent of revenues for Dabur. Countries such as Saudi Arabia, the UAE, Egypt, Nigeria, Kenya and South Africa contribute half of this.

Dabur’s international revenues fell 2-20 per cent in each of the last five quarters because of geo-political tensions in West Asia and currency deprecation in economies such as Egypt, Nigeria and Turkey which resulted in translation losses.

Financials



Better prospects for Gulf countries due to recovery in oil prices, a stabilising, post-reform Egyptian economy, and higher economic growth in Turkey are expected to drive demand. Distribution and expansion initiatives in Nigeria, South Africa and East Africa should help growth. Following a slowdown the earlier quarters, Dabur reported good numbers for the July-September 2017 period, after adjusting for Goods and Services Tax related changes.

For the three months ended September 2017, domestic business revenues grew by about 10 per cent year-on-year led by volume growth of 7.2 per cent.

International business too did well on a constant currency basis, growing 3.9 per cent year-on-year. This was backed by strong growth in Egypt, Nigeria and Turkey. Adjusted consolidated revenues thus grew by 8 per cent to ₹1,958.9 crore. Comparable consolidated profit grew by 7.2 per cent to ₹361.9 crore.

Operating margin came in at 21.4 per cent for the quarter vis-à-vis 20.6 per cent in the same quarter last year (though not strictly comparable due to GST-related changes in accounting).

Barring the prices of copra (used in hair oil), which has inched up sharply in the last year, and inflation in honey, the company expects input costs to remain benign in the near to medium term.

Although it has effected price increases of about 2.8 per cent in the September 2017 quarter, it expects growth in the coming few quarters to be driven predominantly by volumes.

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