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| Dabur India Limited (DABUR IN) Encouraging volume growth in a challenging macro; stay OW | Overweight Price: Rs180.10 28 Apr 2014 Price Target: Rs200.00 PT End Date: 31 Mar 2015 | |
Dabur continues to outperform its peer group. It registered robust 9.2% domestic volume growth in Q4FY14 which is quite encouraging in backdrop of a weak consumption scenario. It stated an FY18 organic revenue target of Rs125bn implying CAGR of 15% over FY14-18E, after having met earlier target of achieving sales of Rs70bn and PAT of Rs9bn in FY14. Overall operational performance was in-line with our estimates with consolidated Sales, EBITDA and PAT posting 16%, 16% and 17% y/y growth respectively. Management continues to hold on to 8-10% volume growth guidance for FY15, expecting 1H to be more challenging vs 2H. There has been a fair bit of momentum on new product introductions and more is expected in foods, personal care and healthcare categories over FY15.
We expect a combination of steady volume growth (8-10%), price rises, margin expansion and recovery in growth rates for Namaste operations to aid healthy growth in FY15E. Stay OW.
Domestic volume growth at 9.2% continues to outperform market growth and is supported by the company’s focused strategy to enhance its distribution reach and significant brand investments. Domestic FMCG growth of 14% y/y was led by health supplements (+18% y/y), foods (+21% y/y), toothpaste (+21% y/y), shampoos (+19% y/y) and digestives (+23% y/y).The hair care segment sales growth remains subdued at 6%. Overseas business registered 20% sales growth with double digit constant-currency growth led by GCC, Egypt, Levant and North Africa.
Domestic volume growth trends
Source: Company
Hoping for recovery in urban growth; moving to Project ‘Core’. Management expects gradual recovery in FY15 in urban growth rates more back ended towards 2H, though no uptick has been seen so far. They don’t expect any significant upside to rural growth rates from current level, however their recent distribution initiative – Project Core – whereby they aim to increase their direct chemist channel reach from ~52K stores currently (from ~33K in Oct’13) to ~75K stores over a year in 150 towns. This initiative would help enhance product width for categories like health supplements, digestives and OTC/Ethicals (chemist channel accounts for ~25% of sales for these) translating into higher and more profitable sales. Poor monsoons remain a key risk for growth in FY15.
Selective approach towards creating a differentiated portfolio. Focus categories for Dabur include health supplements, OTC, toothpastes, foods and home care. Company is less optimistic about growth for hair oils (expected at HSD). Within oral care focus is to improve share of Dabur Red and Meswak which now account for ~65% of sales (vs ~50% a few years ago). Growth for health supplements is being supported by honey and chyawanprash (led by new variants growing 3x regular SKU). Overseas business is expected to deliver 15%+ growth led by new geographies and more non hair-care product investments (hair care currently accounts for ~80% of overseas sales). Mgmt noted that 25-30% of their domestic portfolio is relatively immune to macro slowdown and is qualified as non-discretionary.
Segment wise sales performance (Consolidated)
Y/Y growth (%)
|
Q1FY13
|
Q2FY13
|
Q3FY13
|
Q4FY13
|
Q1FY14
|
Q2FY14
|
Q3FY14
|
Q4FY14
|
Hair Care
|
10.3%
|
13.2%
|
13.9%
|
9.7%
|
11.9%
|
3.9%
|
6.9%
|
5.8%
|
Oral care
|
8.2%
|
7.0%
|
13.8%
|
12.4%
|
8.6%
|
18.8%
|
10.4%
|
17.4%
|
Health Supplements
|
18.0%
|
15.7%
|
12.0%
|
22.6%
|
7.5%
|
16.7%
|
19.5%
|
17.6%
|
Digestives & Candies
|
9.9%
|
-3.5%
|
-5.4%
|
1.5%
|
15.2%
|
12.0%
|
17.6%
|
23.2%
|
Skin care
|
13.3%
|
25.8%
|
15.7%
|
11.1%
|
13.3%
|
17.5%
|
13.3%
|
10.0%
|
Home care
|
14.6%
|
23.0%
|
30.5%
|
33.3%
|
25.6%
|
25.1%
|
15.9%
|
12.8%
|
Foods
|
34.5%
|
17.9%
|
22.2%
|
22.6%
|
18.7%
|
22.0%
|
17.6%
|
20.7%
|
CCD
|
11.8%
|
14.9%
|
13.1%
|
13.7%
|
11.9%
|
12.9%
|
13.4%
|
12.7%
|
CHD/OTC Ethicals
|
12.7%
|
37.2%
|
15.6%
|
13.7%
|
11.8%
|
11.2%
|
13.2%
|
10.9%
|
International Total
|
23.8%
|
24.9%
|
6.0%
|
7.9%
|
13.3%
|
22.2%
|
26.0%
|
19.6%
|
Retail
|
58.3%
|
48.4%
|
25.4%
|
28.5%
|
27.1%
|
17.7%
|
14.3%
|
20.9%
|
Total
|
21.2%
|
20.7%
|
12.5%
|
12.6%
|
13.0%
|
15.0%
|
16.6%
|
15.3%
|
Source: Company
Modest margin expansion likely in FY15. Mgmt expects gross margins to remain flat in 1H but expect them to move up in 2H supported by pricing. A&P spends are likely to remain flat or a bit higher compared to FY14 for the domestic business. Overseas margins are expected to improve in FY15 (to similar levels as India business). In Q4FY14, consolidated GM declined –20bp y/y on account of input cost inflation. Higher A&P spends (+19% y/y, +40bp y/y) and staff costs (+19% y/y, +30bp y/y) were offset by modest increase in other expenses (+9% y/y, -80bp y/y) leading to flat margin growth y/y.
Consolidated EBITDA margin trend | Consolidated A&P/Sales ratio |
Other management discussion takeaways: a) Price growth of 5% likely over FY15, though trend will be decided by RM inflation, b) Growth for Namaste operations likely to pick up in FY15 with increased contribution from Africa which accounted for 32% of revenue in FY14 (benefiting from localized production). Aims to increase share of non-US market here by 5% every year. Profitability for Namaste was impacted by one-time write off of US$3-4mn for old inventory thereby weighing on margins. Profitability is expected to improve significantly in FY15, d) Growth for home care in Q4 moderated to 13% as mosquito repellant brand – Odomos saw relatively lower offtake due to lower institutional sales, e) Hair oils category is fairly mature and is likely to witness mid to high single digit growth, and f) Sales for glucose were flat y/y in FY14
Consolidated quarterly statement – 4QFY14
Rs mn
Mar-13
|
Dec-13
|
Mar-14
|
YoY
|
QoQ
| |
Net Sales/Income from Operations
|
15,311
|
19,043
|
17,690
|
16%
|
-7%
|
(Increase)/Decrease in Stock in Trade
|
-186
|
666
|
-41
| ||
Consumption of raw materials
|
6,330
|
6,917
|
7,055
|
11%
|
2%
|
Purchase of Finished Goods
|
1,255
|
1,692
|
1,567
|
25%
|
-7%
|
Advertising & Sales Promotions
|
1,919
|
2,896
|
2,284
|
19%
|
-21%
|
Staff cost
|
1,283
|
1,580
|
1,529
|
19%
|
-3%
|
Other expenditure
|
2,201
|
2,366
|
2,397
|
9%
|
1%
|
EBITDA
|
2,509
|
2,925
|
2,901
|
16%
|
-1%
|
EBITDA Margin
|
16.4%
|
15.4%
|
16.4%
| ||
Other Income
|
375
|
390
|
437
|
17%
|
12%
|
Depreciation
|
207
|
255
|
263
|
27%
|
3%
|
EBIT
|
2,677
|
3,060
|
3,074
|
15%
|
0%
|
EBIT Margin
|
17.5%
|
16.1%
|
17.4%
| ||
Interest and Financial Charges
|
150
|
72
|
137
|
-9%
|
90%
|
PBT
|
2,527
|
2,988
|
2,938
|
16%
|
-2%
|
Tax
|
507
|
546
|
582
|
15%
|
7%
|
Net Profit/(Loss)
|
2,020
|
2,442
|
2,355
|
17%
|
-4%
|
Minority Interest
|
-15
|
-7
|
-2
| ||
Net Profit/(Loss) after minority Interest
|
2,006
|
2,435
|
2,353
|
17%
|
-3%
|
% of sales
| |||||
COGS
|
48.3%
|
48.7%
|
48.5%
| ||
Advertising
|
12.5%
|
15.2%
|
12.9%
| ||
Staff
|
8.4%
|
8.3%
|
8.6%
| ||
Others
|
14.4%
|
12.4%
|
13.6%
|
Source: Company reports.
Investment Thesis
We are OW on Dabur as we think it is likely to fare relatively better in a slowing consumption growth environment, given a significant share of product portfolio is skewed toward the mass/mid segment and the company’s increasing focus on distribution enhancement. We expect high-teens earnings growth aided by steady volume growth, price rises, margin expansion and a recovery in growth rates for Namaste operations.
Valuation
Our Mar-15 price target of Rs200 is based on a one-year forward P/E of 28x, which is at a 10% premium to the stock’s past three year average of 26x. We believe the premium is justified given our expectation of sustained healthy volume growth and a better earnings growth trajectory.
Risks to Rating and Price Target
Key downside risks to our rating and price target include: 1) a deceleration in volume growth, 2) increased competition in personal care categories such as skin care, oral care and hair care, and 3) any earnings-dilutive acquisitions.
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