Dabur - an undervalued gem; visit note; Buy:: Edelweiss

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We met Sunil Duggal, CEO of Dabur, to get insight into domestic business and international acquisitions. Given below are our key takeaways:

n  Extremely positive on African opportunity

Dabur is extremely positive on African opportunity as (a) African GDP is bigger than India; (b) penetration levels of FMCG products lower or similar to that in India 3; (c) multinational FMCG companies are less active in Africa; and (d) support from local governments to set up business in Africa. 

n  Synergy benefits from acquisitions; to be EPS accretive in first year

Dabur recently acquired Namaste Laboratories (Namaste) for USD 100 mn (EV/sales of 1.2x CY09 sales). The deal rationale is: (a) fast growing hair care portfolio targeted at ethnic groups (Namaste’s five year CAGR was 21%); (b) stronger brand equity of US brands in Africa; and (c) leverage Namaste’s distribution for Dabur products in US, Europe, Middle-East and Africa. The acquisition is funded by external borrowing at ~3% cost. Namaste has little debt on its books; the deal is expected to be EPS accretive in year 1 itself. Hobi offers good distribution synergies in MENA region; Turkey business expansion a focus.

n  Domestic business on auto-pilot; new products additional growth driver Sales in Chyawanprash (~6% FY10 sales) surged 50.4% in H1FY11 boosted by the launch of new orange and mango flavored variants. Decline in shampoo (~4% FY10 sales) was contained from 17% decline in Q1FY11 to 14% decline in Q2FY11 and Dabur expects recovery in Q4FY11. Fem Care was relaunched after improving the formulation in H1FY11. We believe this product can yield ~20-25% growth in FY11E. Recently, under the Nutrigo brand, Dabur launched different OTC product ranges targeting men and women. The Real brand is going ahead with the 360 degree communication plan, which includes innovative OOH campaign, in-cinema advertising, TVC, radio, DTH and print advertising.

n  Outlook and valuations: Correction overdone; maintain ‘BUY’

We are positive on Dabur’s domestic business and progress in international businesses. Dabur has traded in the 20-25x 1-year forward range and has underperformed the FMCG index by 11% in past 3 months. We reiterate our ‘BUY’ recommendation on the stock and rate it ‘Sector Outperformer’ on relative return basis.