Buy Dabur India: 3QFY11: Top Picks: Ambit

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Dabur India


Moving Into Higher Gear
Dabur’s stock price performance over the last four months has been
sluggish on account of a slowdown in revenue growth. We expect
topline growth of nearly 30% (including acquisitions) in 2HFY11E as
against 17% in 1HFY11. This should provide significant impetus to
stock price performance. We recommend a BUY on the stock with
above consensus earnings estimates (6% above consensus for FY12)
and a September 2011 target price of Rs115, implying 14% upside.

Key Investment Drivers
 Domestic business will likely see improvement in revenue growth
rates to 17.7% in 2HFY11E from 15.4% in 2QFY11, led by improvement
in general demand and several new launches in categories such as Health
Supplements (new variants of Chyawanprash), Home Care (Odomos oil,
Odonoil electric air freshner), Foods (new variants in Real juices) and
Consumer Health Division (CHD - 8-10 new launches in the areas of
vitamins, cold & cough and gastro over the next 12-15 months).
 Some of the recent acquisitions (Hobi, Namaste) are good strategic
fits with the existing international operations through facilitating
introduction of new products and expanding the company’s global
markets. We expect these acquisitions to contribute as much as 600bps to
our aggregate revenue growth estimates of 22% for FY11-13E. More
specifically, we expect contribution to the topline of around 13.0% for
FY12E and 13.4% for FY13E, and to PAT of around 7.7% for FY12E and
9.1% for FY13E.
 Inorganic growth will continue to remain an important priority for
the company considering that free cash flow (FCF) from operations will see
an improvement to Rs7bn in FY12E from Rs4bn in FY10. Personal Care
and CHD will continue to remain important areas of focus and we expect
the company to closely evaluate possible transactions in this space.
Valuation, Recommendation and Outlook
Including acquisitions, we expect the company to report topline growth of 22%
and net earnings growth of 27% for FY11-13E. The stock is currently trading at
an FY12 P/E multiple of 22.7x implying 3% discount to peers despite having a
higher expected growth rate (FY11-13E EPS CAGR of 27% compared to peer
median of 17%). Our valuation implies a forward P/E multiple of 23x and a
relative P/E multiple (to MSCI India) of 1.3x, which is consistent with Dabur’s
multiple during the strong growth period of FY05-07.
We believe that: (i) likelihood of improved domestic growth momentum; (ii)
the recent attractive international acquisitions; and (iii) inorganic growth
opportunities; are not adequately priced in the share price. These should
drive stock price performance over the near term.
Significant decline in consumer spends and/or consumer confidence,
legislative changes (taxation etc.) and high inflation (which may impact
demand and EBITDA margin) are some of the key risks to our BUY stance
and target price.

Dabur is one of the fastest growing consumer
companies in India with presence across several
categories such as hair care, health supplements, oral
care, foods, home care etc. Over the last few years, the
company has also built a significant presence in
international markets particularly the Middle East and
Africa. The company has also relied on the inorganic
growth route by way of acquiring companies such as
Balsara (2005), Fem Care (2008) and recent
international acquisitions — Hobi and Namaste.