Dabur - Reclaiming growth; visit note; Buy ;Edelweiss

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Dabur (DABUR IN, INR 95, Buy)

Our recent interaction with Dabur management has infused us with confidence that volume growth is likely to revive in Q3FY12 (5% in Q2FY12), shampoo growth is expected to stabilize (versus decline in past few quarters) and gross margin pressure is likely to recede. However, it must be noted that the company, in a bid to regain volume growth, is launching new products and enhancing ad spending, which may offset gross margin gains. But, we believe investment in brands to be long term positive from Dabur’s perspective. Maintain ‘BUY’.

Volume growth on revival track; shampoos to stabilize

Dabur expects Q3FY12 volume growth to recover as: (a) restructuring of consumer health segment is largely complete; (b) toothpaste supply is back to normal; (c) ad spending has been increased; (d) new product launch (almond hair oil). Shampoo sales is likely to stabilize in Q3FY12 (against decline since past few quarters; sales had dipped by 25.4% YoY in Q2FY12).  It is setting up a plant in Sri Lanka which will improve supply to South India and also tap local market over longer term.

Gross margin compression easing off; ad spending to surge

Raw material costs have peaked out and Dabur expects gross margin compression to be lower in Q3FY12 vis-à-vis Q2FY12. However, we believe costs will remain volatile along with currency fluctuations. Also, the company has effected 7-8% YoY price hikes in Q2FY12 and Q3FY12. However, ad spending is likely to surge, hence, EBITDA margin may remain under pressure. In Q2FY12, it had spent just 10.1% of sales on ads (long-term average 12-13%).

Outlook and valuations: Growing strong; maintain ‘BUY’

Revival in demand, calibrated price hikes, new launches and long‐term benefits from international acquisitions Hobi and Namaste will act as long-term positives. At CMP the stock is trading at P/E of INR 25.6x and INR 21.3x on FY12E and FY13E, respectively. We maintain‘BUY’ with ‘Sector Performer’ rating.