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Dabur India (DABUR)
OW: Ride through the storm
Management seems confident of maintaining c10% volume
growth in FY12e with a c5% price growth
Cost pressures unlikely to pressure margins as price
increases have been affected
Maintain Overweight; target price of INR115, derived using
multiple of 24x on March 2013 EPSe
Challenges to be met: Dabur is facing pressures from input cost inflation on the one hand
and competition on the other. However, we believe that EPS downgrades are unlikely as
the company is tackling cost inflation through price increases and reducing exposure to
competition via expansion in foreign geographies. Moreover, the company seems
confident of achieving double-digit volume growth, which may be slightly below its
historic trend but a satisfactory performance, nevertheless, in the current environment.
While we do not rule out a couple of rough quarters we are still positive on the medium
term outlook on the stock.
Areas to watch out for: We believe following need to be monitored, which will impact stock
behaviour (1) shampoo category growth – should report flattish growth in June quarter after 2
quarters of c30% declines (2) impact if any of price increases on volumes (3) Performance of
recent international acquisitions of Hobi and Namaste – indicators such as sales growth,
expansion in new geographies (4) any further inflation in commodity costs could spell trouble:
volumes suffer if prices are increased and margins if they are not.
Valuation and risks: We maintain our target price of INR115 based on 24x March 2013e
EPS, which is close to its current forward multiple of 25x and its historic forward multiple
average of 23x, as we believe that future performance is not likely to be too different
from the past. The key risks are slower consumer spending, increased competition, higher
raw material costs and retail losses deeper than anticipated.
Dabur, for the March 2011 quarter, reported consolidated Net sales of INR11,082m (30.6% y-o-y).
However, adjusting for M&A during the period, the growth was c13.5% for the quarter – 15% domestic
and 10% international (International was lower due to disruptions in the Middle East). Volume growth in
the domestic business was 9-10%, which is below the c12% that Dabur usually registers. Price increases
taken for the period were c5-6%, which is c2ppt above the norm for Dabur price increases, which it had to
resort to due to input cost pressures.
Gross margins expanded by 116bp, but adjusting for M&A, the compression would be in the region of
200bp or so (Namaste outsources all raw material purchases and hence these are classified as ‘Other
expense’ rather than COGS), a bit less than our estimate of c320bp. The reason could be that price
increases taken in Q4 were higher than the cost pressures –while spot prices of commodities are certainly
higher, Dabur could be working on lower-cost old inventory.
For the quarter, EBITDA was INR2,130m (24.1% y-o-y). Stripping out the EBITDA contribution of Namaste
Labs, we estimate that EBITDA was INR1,930m, in line with our estimate. Ad-spend for the consolidated
business was 11.5% of net sales, which is low compared to normal. Management has said this is an aberration
and its future sustainable level of ad-spend to net sales ratio would be in the region of 13-15%
Net profit reported was INR1,470m (8.5% y-o-y). However, adjusting for the impact of M&A, it could be
cINR100m lower i.e., a c2-3% y-o-y increase. The reason for lower growth in PAT compared to EBITDA
is higher interest costs, depreciation, and effective tax rate (22% actual vs. 18.5% estimated, due to
deferred tax provisioning of INR35-40m.).
In terms of category growth, Shampoo continues to decline despite 40% higher volume offered in sachets.
This is on account of higher competitive intensity with HUL and P&G. Foods continued its strong
performance at 30%. Details of the category break up are in the table that follows.
Consumer Care Division (CCD), which contributes c62% of total gross sales, grew by 15.4% y-o-y
for FY11, which is the best on record, and similar growth was observed for the current quarter as
well. Hair care, which is the largest category, for FY11, posted a growth of 6.7% Within this
category, the Hair oils sub category grew at 15% y-o-y. Shampoos, the other sub category within Hair
care, which is facing increasing competition from HUL and P&G, performed poorly, with growth
declining by 22.3% y-o-y and pulling down the overall growth of Hair care.
Health supplements grew a healthy 23% y-o-y for FY11. Within this, Dabur Chyawanprash reported
one of its best performances, with 20.1% y-o-y growth in FY11. Consistent increases in consumption
of branded honey bode well for Dabur honey, which recorded double-digit growth in Q4FY11 and
FY11. Dabur Glucose registered a strong 48% y-o-y growth in FY11 and continued to gain market
share. Nutrigo Health supplements, launched in 3QFY11, has been well accepted by consumers.
Oral Care grew by 12.1% y-o-y in FY11, higher compared to growth during the quarter of 8.8%.
Toothpastes grew by 16.8% y-o-y in FY11, growing ahead of category as per AC Nielsen. Dabur Red
toothpaste and Babool were the strong performers driven by consumer activations.
Digestives grew by 8.9% y-o-y in FY11 but saw a decline of 3.7% y-o-y for the quarter. Hajmola brand
reported growth of 6.4% for FY11 driven by new packaging and variants. Lal Tail grew by 15.4% in FY11
and 21% in Q4FY11, driven by initiatives such as increasing reach among rural consumers.
Skin care grew by 16.8% y-o-y in FY11 and 26.3% in Q4FY11. Gulabari (with Variants) grew by
18.8% in FY11, driven by consumer promotions. The Fem portfolio grew by 16.1% in FY11, which
saw a revival in growth in later half of the year largely driven by strong growth in bleaches.
Home care registered a growth of 32.5% y-o-y in FY11. Odonil grew by 63.7% in FY11 post
relaunch. Odonil Pluggy electrical air fresheners have found good acceptance in the market. Sanifresh
grew by 22.7% in FY11.
Food registered a growth of 28.3% y-o-y in FY11 and 30.1% in Q4FY11. Real Fruit Juices recorded
growth of 29.6%. Activ range grew by 22.5% in FY11 and Fibre enriched variants launched under
Activ brand have done well.
Consumer Health Division CHD registered 13% growth in FY11 and 13.7% in Q4FY11. The key
brands – Pudin Hara, Honitus, Shilajit and Dashmularishta performed well during FY11. Honitus
Day & Night tablets launched as part of the OTC expansion strategy
International Business Division posted organic growth of 17.6% in FY11 and 22.1% in constant currency
terms. In Q4FY11 IBD grew by 10% and 12.9% in constant currency terms. Recent events in the Middle
East and North Africa have impacted growth in Q4 FY11. Post the acquisition of Namaste & Hobby, IBD
reported total sales of INR8,924m, which was 22% of total consolidated sales.
Management comments from conf call, Road ahead
Though the shampoos segment is witnessing an intense price war, there hasn’t been too much change
in the market share of players, with P&G the net gainer, with an increase of 1ppt, as per AC Nielsen.
In a sense, this price war in the shampoo space was due as it enjoyed a very high gross margins
earlier and is correcting now, probably over correcting a bit. Going forward, we think volumes will
accelerate for the category as a whole as the value proposition (price cuts, increased grammage) is
becoming increasingly favourable for consumers. Dabur, for its part, will continue to focus on market
share and not margins in the next one year.
Given the increasing mix of international business in the consolidated business, the company will
likely move away from being obsessed with the EBITDA margin target of 20% (towards something
like a 17-18% range; our estimate is 18-19%), as it senses a longer term repercussion for growth.
Going forward, the focus will be more on top-line growth, where we estimate c19% average y-o-y
growth for next two years, and the bottom-line, where we forecast c21% growth over next two years.
The management believes that, given the favourable macro environment for India, competition is
likely to intensify in consumer sector. However, Dabur is in direct competition with established
majors in only 3-4 categories like – Shampoos, Toothpaste, Juices etc.., so we expect more profitable
growth. Also, a “Shampoo-like” price war is not seen in other categories and companies are affecting
price increase in other categories.
The company is also shifting its focus, in terms of developing and introducing new products, from
HPC to Healthcare and OTC products, which have relatively lower competition and in which Dabur
has expertise, ensuring that it plays to its strengths and not to competitors’ strengths.
Given an intensifying domestic business environment, Dabur will continue to look for overseas
acquisitions that provide a good strategic fit. Some plans for existing international businesses are:
For Namaste, Dabur intends to increase the revenue share of African business from 30% to 50%
in next 4-5 years starting next fiscal year. The current Fiscal year will be for building up the
infrastructure to enable local manufacture and thereafter grow at a rapid pace.
Hobby products will likely be introduced in other countries where Dabur has a presence. Initially,
the products will be imported and distributed using existing infrastructure and without any
advertisement support. Once it gains traction, then it may expand more aggressively.
The company is also focussing on expanding its distribution reach, particularly in rural areas, where it has
to depend a lot on wholesales and stockist. Going forward they want to reduce this dependence and build
its own presence. It intends to build a cadre of people who will focus exclusively on selling to rural areas.
The company is also looking to expand its retail business in the short term and plan to increase the
number of stores from 38 currently to 75 by the end of year, without hurting the balance sheet too
much (capping losses at INR100m per annum). In the long term, the retail business won’t remain
embedded with Dabur and they plan to spin it off and unlock value.
Investment thesis
Dabur is a diversified FMCG company in segments such as hair oils, shampoos, oral care, home care,
skin care, foods, and healthcare. The company has a high sales growth rate (we forecast an average of
c19% for next two years) and volume-led growth that is broad based and visible in all sub-categories. The
company is an India consumer play and with more consumers escaping poverty, consumption of
consumer staples products is set for what we anticipate will be long term and sustainable growth. The
recent acquisition of Namaste Labs is strategically positive and potentially EPS accretive by c5% in
FY12e. We also believe that accretion could offset the negative impact of a slowdown in the shampoo
business and cost inflation.
Valuation and risks
We maintain our target price of INR115 based on 24x March 2013e EPS. Our target multiple of 24x is
close to the current forward multiple of 25x and also not far off from its historic forward multiple average
of 23x. We believe that future performance is not likely to be too different from the past and our target
multiple is reflective of that.
Under HSBC’s research model, for non-volatile Indian stocks, the Neutral band is 5ppt above and below
the hurdle rate of 11% for India. This translates into a Neutral rating band of 6-16% above the current
share price. Our target price of INR115, including an estimated 1.4% dividend yield, implies a potential
return of 16.9%, which is above the Neutral band. We thus reiterate our Overweight rating on Dabur.
Downside risk: Slower consumer spending due to slowdown in the economy; higher input cost inflation;
retail losses deeper than estimated; increasing competitive pressures; synergies expected with FCPL not
flowing through.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dabur India (DABUR)
OW: Ride through the storm
Management seems confident of maintaining c10% volume
growth in FY12e with a c5% price growth
Cost pressures unlikely to pressure margins as price
increases have been affected
Maintain Overweight; target price of INR115, derived using
multiple of 24x on March 2013 EPSe
Challenges to be met: Dabur is facing pressures from input cost inflation on the one hand
and competition on the other. However, we believe that EPS downgrades are unlikely as
the company is tackling cost inflation through price increases and reducing exposure to
competition via expansion in foreign geographies. Moreover, the company seems
confident of achieving double-digit volume growth, which may be slightly below its
historic trend but a satisfactory performance, nevertheless, in the current environment.
While we do not rule out a couple of rough quarters we are still positive on the medium
term outlook on the stock.
Areas to watch out for: We believe following need to be monitored, which will impact stock
behaviour (1) shampoo category growth – should report flattish growth in June quarter after 2
quarters of c30% declines (2) impact if any of price increases on volumes (3) Performance of
recent international acquisitions of Hobi and Namaste – indicators such as sales growth,
expansion in new geographies (4) any further inflation in commodity costs could spell trouble:
volumes suffer if prices are increased and margins if they are not.
Valuation and risks: We maintain our target price of INR115 based on 24x March 2013e
EPS, which is close to its current forward multiple of 25x and its historic forward multiple
average of 23x, as we believe that future performance is not likely to be too different
from the past. The key risks are slower consumer spending, increased competition, higher
raw material costs and retail losses deeper than anticipated.
Dabur, for the March 2011 quarter, reported consolidated Net sales of INR11,082m (30.6% y-o-y).
However, adjusting for M&A during the period, the growth was c13.5% for the quarter – 15% domestic
and 10% international (International was lower due to disruptions in the Middle East). Volume growth in
the domestic business was 9-10%, which is below the c12% that Dabur usually registers. Price increases
taken for the period were c5-6%, which is c2ppt above the norm for Dabur price increases, which it had to
resort to due to input cost pressures.
Gross margins expanded by 116bp, but adjusting for M&A, the compression would be in the region of
200bp or so (Namaste outsources all raw material purchases and hence these are classified as ‘Other
expense’ rather than COGS), a bit less than our estimate of c320bp. The reason could be that price
increases taken in Q4 were higher than the cost pressures –while spot prices of commodities are certainly
higher, Dabur could be working on lower-cost old inventory.
For the quarter, EBITDA was INR2,130m (24.1% y-o-y). Stripping out the EBITDA contribution of Namaste
Labs, we estimate that EBITDA was INR1,930m, in line with our estimate. Ad-spend for the consolidated
business was 11.5% of net sales, which is low compared to normal. Management has said this is an aberration
and its future sustainable level of ad-spend to net sales ratio would be in the region of 13-15%
Net profit reported was INR1,470m (8.5% y-o-y). However, adjusting for the impact of M&A, it could be
cINR100m lower i.e., a c2-3% y-o-y increase. The reason for lower growth in PAT compared to EBITDA
is higher interest costs, depreciation, and effective tax rate (22% actual vs. 18.5% estimated, due to
deferred tax provisioning of INR35-40m.).
In terms of category growth, Shampoo continues to decline despite 40% higher volume offered in sachets.
This is on account of higher competitive intensity with HUL and P&G. Foods continued its strong
performance at 30%. Details of the category break up are in the table that follows.
Consumer Care Division (CCD), which contributes c62% of total gross sales, grew by 15.4% y-o-y
for FY11, which is the best on record, and similar growth was observed for the current quarter as
well. Hair care, which is the largest category, for FY11, posted a growth of 6.7% Within this
category, the Hair oils sub category grew at 15% y-o-y. Shampoos, the other sub category within Hair
care, which is facing increasing competition from HUL and P&G, performed poorly, with growth
declining by 22.3% y-o-y and pulling down the overall growth of Hair care.
Health supplements grew a healthy 23% y-o-y for FY11. Within this, Dabur Chyawanprash reported
one of its best performances, with 20.1% y-o-y growth in FY11. Consistent increases in consumption
of branded honey bode well for Dabur honey, which recorded double-digit growth in Q4FY11 and
FY11. Dabur Glucose registered a strong 48% y-o-y growth in FY11 and continued to gain market
share. Nutrigo Health supplements, launched in 3QFY11, has been well accepted by consumers.
Oral Care grew by 12.1% y-o-y in FY11, higher compared to growth during the quarter of 8.8%.
Toothpastes grew by 16.8% y-o-y in FY11, growing ahead of category as per AC Nielsen. Dabur Red
toothpaste and Babool were the strong performers driven by consumer activations.
Digestives grew by 8.9% y-o-y in FY11 but saw a decline of 3.7% y-o-y for the quarter. Hajmola brand
reported growth of 6.4% for FY11 driven by new packaging and variants. Lal Tail grew by 15.4% in FY11
and 21% in Q4FY11, driven by initiatives such as increasing reach among rural consumers.
Skin care grew by 16.8% y-o-y in FY11 and 26.3% in Q4FY11. Gulabari (with Variants) grew by
18.8% in FY11, driven by consumer promotions. The Fem portfolio grew by 16.1% in FY11, which
saw a revival in growth in later half of the year largely driven by strong growth in bleaches.
Home care registered a growth of 32.5% y-o-y in FY11. Odonil grew by 63.7% in FY11 post
relaunch. Odonil Pluggy electrical air fresheners have found good acceptance in the market. Sanifresh
grew by 22.7% in FY11.
Food registered a growth of 28.3% y-o-y in FY11 and 30.1% in Q4FY11. Real Fruit Juices recorded
growth of 29.6%. Activ range grew by 22.5% in FY11 and Fibre enriched variants launched under
Activ brand have done well.
Consumer Health Division CHD registered 13% growth in FY11 and 13.7% in Q4FY11. The key
brands – Pudin Hara, Honitus, Shilajit and Dashmularishta performed well during FY11. Honitus
Day & Night tablets launched as part of the OTC expansion strategy
International Business Division posted organic growth of 17.6% in FY11 and 22.1% in constant currency
terms. In Q4FY11 IBD grew by 10% and 12.9% in constant currency terms. Recent events in the Middle
East and North Africa have impacted growth in Q4 FY11. Post the acquisition of Namaste & Hobby, IBD
reported total sales of INR8,924m, which was 22% of total consolidated sales.
Management comments from conf call, Road ahead
Though the shampoos segment is witnessing an intense price war, there hasn’t been too much change
in the market share of players, with P&G the net gainer, with an increase of 1ppt, as per AC Nielsen.
In a sense, this price war in the shampoo space was due as it enjoyed a very high gross margins
earlier and is correcting now, probably over correcting a bit. Going forward, we think volumes will
accelerate for the category as a whole as the value proposition (price cuts, increased grammage) is
becoming increasingly favourable for consumers. Dabur, for its part, will continue to focus on market
share and not margins in the next one year.
Given the increasing mix of international business in the consolidated business, the company will
likely move away from being obsessed with the EBITDA margin target of 20% (towards something
like a 17-18% range; our estimate is 18-19%), as it senses a longer term repercussion for growth.
Going forward, the focus will be more on top-line growth, where we estimate c19% average y-o-y
growth for next two years, and the bottom-line, where we forecast c21% growth over next two years.
The management believes that, given the favourable macro environment for India, competition is
likely to intensify in consumer sector. However, Dabur is in direct competition with established
majors in only 3-4 categories like – Shampoos, Toothpaste, Juices etc.., so we expect more profitable
growth. Also, a “Shampoo-like” price war is not seen in other categories and companies are affecting
price increase in other categories.
The company is also shifting its focus, in terms of developing and introducing new products, from
HPC to Healthcare and OTC products, which have relatively lower competition and in which Dabur
has expertise, ensuring that it plays to its strengths and not to competitors’ strengths.
Given an intensifying domestic business environment, Dabur will continue to look for overseas
acquisitions that provide a good strategic fit. Some plans for existing international businesses are:
For Namaste, Dabur intends to increase the revenue share of African business from 30% to 50%
in next 4-5 years starting next fiscal year. The current Fiscal year will be for building up the
infrastructure to enable local manufacture and thereafter grow at a rapid pace.
Hobby products will likely be introduced in other countries where Dabur has a presence. Initially,
the products will be imported and distributed using existing infrastructure and without any
advertisement support. Once it gains traction, then it may expand more aggressively.
The company is also focussing on expanding its distribution reach, particularly in rural areas, where it has
to depend a lot on wholesales and stockist. Going forward they want to reduce this dependence and build
its own presence. It intends to build a cadre of people who will focus exclusively on selling to rural areas.
The company is also looking to expand its retail business in the short term and plan to increase the
number of stores from 38 currently to 75 by the end of year, without hurting the balance sheet too
much (capping losses at INR100m per annum). In the long term, the retail business won’t remain
embedded with Dabur and they plan to spin it off and unlock value.
Investment thesis
Dabur is a diversified FMCG company in segments such as hair oils, shampoos, oral care, home care,
skin care, foods, and healthcare. The company has a high sales growth rate (we forecast an average of
c19% for next two years) and volume-led growth that is broad based and visible in all sub-categories. The
company is an India consumer play and with more consumers escaping poverty, consumption of
consumer staples products is set for what we anticipate will be long term and sustainable growth. The
recent acquisition of Namaste Labs is strategically positive and potentially EPS accretive by c5% in
FY12e. We also believe that accretion could offset the negative impact of a slowdown in the shampoo
business and cost inflation.
Valuation and risks
We maintain our target price of INR115 based on 24x March 2013e EPS. Our target multiple of 24x is
close to the current forward multiple of 25x and also not far off from its historic forward multiple average
of 23x. We believe that future performance is not likely to be too different from the past and our target
multiple is reflective of that.
Under HSBC’s research model, for non-volatile Indian stocks, the Neutral band is 5ppt above and below
the hurdle rate of 11% for India. This translates into a Neutral rating band of 6-16% above the current
share price. Our target price of INR115, including an estimated 1.4% dividend yield, implies a potential
return of 16.9%, which is above the Neutral band. We thus reiterate our Overweight rating on Dabur.
Downside risk: Slower consumer spending due to slowdown in the economy; higher input cost inflation;
retail losses deeper than estimated; increasing competitive pressures; synergies expected with FCPL not
flowing through.
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