Dabur - Sowing seeds of future growth; visit note; Buy ::Edelweiss PDF link

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Dabur (DABUR IN, INR 104, Buy)

Our recent meeting with Mr. Sunil Duggal, CEO, Dabur, reinforces our positive stance on the company. Dabur is investing in enhancing its direct distribution reach in rural India and enhance product portfolio to accelerate rural growth. It is likely to plough back most of the gross margin expansion in FY13 into ad spends. The union budget did not provide any major positive announcement. The company may consider passing on excise hikes announced in the budget to consumer and the company feels that it may threaten to hurt consumer demand. We believe in Dabur’s investment strategy which is likely to pay-off in the long run. Maintain ‘BUY’.

Aggressive ad spending to reinforce brand equity, drive volumes

Domestic business volume growth is expected to be sustained at high single digit in coming quarters (rebound in Q3FY12 to ~8% YoY from ~5% in Q2FY12). Dabur is targeting 100bps per quarter improvement in gross margin for the next few quarters. Management plans to plough most of this back into ad spending.

Eye on future: Investing heavily in long-term growth drivers

Dabur’s recent entry in almond oil category has met with decent success and is looking to launch variants in the food category based on the health plank. It will incur ~INR200mn-250mn incremental cost annually to increase distribution reach. It is also investing ~INR1bn over the next two years to set up plants in Africa, to aid local manufacture of Namaste products. International business is currently in growth phase; likely to improve margins in Namaste and Hobi over the long term.

Outlook and valuations: Growing strong; maintain ‘BUY’

We like the company’s renewed aggression in terms of ad spending and product innovation. At CMP the stock is trading at P/E of 24.0x and 19.4x on FY13E and FY14E, respectively. We maintain ‘BUY/Sector Outperformer’ rating on the stock.

Dabur - Sowing seeds of future growth; visit note; Buy