Dabur: Natural way to growth - Buy

The Dabur stock is a good play on the increasing consumer preference for herbal, ayurvedic and natural products. An established player in this segment across categories such as personal care, health care and foods, Dabur has seen strong domestic demand in the last few quarters. Once impacted by competitors such as Patanjali in honey and Chyawanprash, the company is now back on the growth path in these products. Over the medium term, prospects for its international business (25 per cent of consolidated revenues) too remain sanguine.

Like most other FMCG stocks, Dabur has moved up quite a bit in the last one year and has seen its valuation expand. From our ‘buy’ call in January 2018 at ₹349, the stock has gained about 30 per cent so far. It now trades at a PE of 54 times its trailing 12-month consolidated earnings. While this valuation is not per se cheap, the fact that Dabur still trades at a discount to Hindustan Unilever (67 times) offers some comfort. Investors with a one to two-year perspective can buy the stock. The stock can be bought in phases on dips related to broader market volatility.

Robust volumes

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, Hommade ). While home and personal care products bring in half the revenues, the healthcare segment chips in with 35-40 per cent. Foods bring in the rest. In the last few quarters, the company has been quick to recover from the impact of the transition to GST.

Domestic volume growth, which dropped by 4.4 per cent in the three months ended June 2017 (over June 2016 quarter), ahead of the GST implementation on July 1, picked up in July-September, moving up by 7.2 per cent. In the six quarters since then, the company has seen volumes growing between 7 per cent and 21 per cent in each of the quarters.

Dabur should continue to show good traction in domestic volumes. In the months to come, various measures announced in the Budget to boost farmer incomes will help lift consumption of small-ticket consumer items. The company has significant exposure to rural areas, from where it derives 45-50 per cent of revenue. In the last few quarters, rural sales for the company have grown at a faster pace than urban. Besides, the moves to put more money in the hands of the unorganised sector workers as well as the middle-income group will give a leg-up to urban consumption. Low inflation and consequent cuts in borrowing costs by banks will also increase disposable incomes.

Growth drivers

With consumers showing greater interest in herbal, ayurvedic and natural products, Dabur is on a strong wicket on this front. While competition from Patanjali in honey and Chyawanprash did dent Dabur initially, it has since regained its mojo. Reversing the decline in the previous several quarters, the health supplements sub-category, which includes honey and Chyawanprash, has grown in double-digits since the September 2017 quarter. The company has begun tapering off promotions for honey too. The Babool toothpaste continues to face stiff competition from Patanjali and Hindustan Unilever at the ₹10 price point. But with brands such as the Red and Meswak, Dabur otherwise has done well over the last few quarters in the oral care sub-category as well.

Other personal care segments such as hair oils and shampoos also continue to see good market share gains, though Dabur is not a big player in these segments. The hair care segment has grown in double-digits in the last three quarters. Value-added hair oils such as the brahmi amla hair oil, almond hair oil and the recently launched soya-protein enriched almond hair oil have driven growth. The relaunch of the Vatika range of shampoos also helped. For the next leg of growth in the herbal, ayurvedic and natural space, the company is betting on over-the-counter medications category. It has a strong portfolio of products such as Honitus, Lal Tail, and Shilajit in this segment.

International business

Dabur’s international business, which brings about 25 per cent of the revenues is on a shaky ground right now. In the last four quarters, international revenue growth on a constant currency basis has been gradually tapering off from 16 per cent in the March 2017 quarter to about 1 per cent in the latest December 2018 quarter.

While sales in markets such as Pakistan, Bangladesh, Turkey, the US and parts of Africa have done well, the company faces some problems in the EU with respect to distribution of its products. Besides, sales in the GCC countries — which bring about 30-35 of international revenues for Dabur – have slowed due to lacklustre demand from macro-economic headwinds. However, the company expects these issues to resolve over the next two quarters.

Financials

For the quarter ended December 2018, consolidated revenue of ₹2,199 crore, a growth of 11.8 per cent over the same quarter in the previous year. Consolidated profits stood at ₹366 crore, showing a 10.2 per cent growth year-on-year. Despite a high base, the domestic FMCG business recorded a 15.2 per cent value growth backed by 12.4 per cent volume growth. Raw material costs as a percentage of revenue came in at 50.7 per cent, higher than the 48.4 per cent recorded a year ago. But thanks to the reining in of advertising spends as well as price increases, the impact on the operating margin was minimal. It came in at 20.3 per cent, against 20.5 per cent a year ago.

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