ENAM - >> Update: Dabur India

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We recently met with the senior management of Dabur India Ltd. to get an update on the future prospects of the co. Key takeaways from our interaction are furnished below:

q       Growth to step up in H2FY12: Distribution realignment and competitive pricing pressure impacted the growth of consumer care business excluding foods (54% of revenue) in Q2. However, a combination of price hikes and increase in brand investments is expected to improve revenue growth to 16% in H2FY12.

q       Competitive intensity in shampoo remains elevated with premium brands entering the popular price point (Dove being launched at Re 1 price point). Mgmt also commented that price hike in toothpaste category has been less than adequate given the cost inflation. The fruit juice category has been witnessing influx of new players (including MNCs), which could queer the pitch in this category as well. Together the three categories constitute ~30% of Dabur’s domestic revenues.

q       Brand investment to rise: ASP spends are expected to rise owing to heightened competitive intensity and new product introduction. We are factoring in higher ASP spends at 12.3% of net sales in H2 as against 11.3% in H1.

q       Operating margin likely to remain under pressure: We are factoring in a 110 bps YoY decline in the EBITDA margin in H2.

Considering the above factors, we have marginally lowered our earnings estimates by 2% each for FY12 (to Rs 3.7) and FY13 (to Rs 4.5). However, we believe Dabur continues to maintain its competitive position for over 3/4th of its portfolio and temporary shortfalls should be perceived as a BUY opportunity.

Dabur has underperformed the Sensex by 13% over the last three months and trades at 1-yr fw P/E of 22.5x, below its 5-yr historical median of 25x. Maintain BUY with a revised TP of Rs 109 (vs. Rs 112 earlier) based on 24xFY13E earnings. At CMP of Rs 95, the stock trades at 26xFY12E and 21xFY13E EPS. Our TP implies an upside of 15% from CMP.