Near term pain, long term gain Dabur: HDFC Securities

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Near term pain, long term gain Dabur’s 3QFY15 total income grew by 9.2% YoY, marginally below estimate led by disappointing international sales growth of 3.6% YoY in constant currency terms. Domestic FMCG business volumes grew 7.4% (vs. expectation of 8%). Dabur still beats peers (HUL 3%, Colgate 6%, Asian Paints 2%). EBITDA margin expanded 130bps YoY to 16.9% aided by lower COGS and other expenses. APAT grew by 16.2% to ~Rs 2.8bn (inline). The company has set an organic revenue target of Rs 125bn by FY18E. We believe Dabur is well placed to achieve the target owing to (1) ambitious expansion of its presence in the chemist channel (double in two years), which would benefit its OTC portfolio (2) planned launch of differentiated and premium products backed by higher ad spends and (3) sustained dominance in the fruit juice category. Key segments (OTC & Ethicals, Hair Care, Home Care, Oral Care) witnessed improvement in growth rates, indicating the success of Dabur’s volume focused strategy. We are enthused by the anticipated margin expansion coupled with macro tailwinds. Upgrade to BUY with a TP of Rs 282. Volumes resilient  3QFY15 revenues grew by 9.2% YoY to Rs 20.8bn led by 11.7% YoY growth in the domestic FMCG business (7.4% volume led). Food business saw lower growth (11.8% YoY) impacted by the early festive season. Global business grew by a mere 3.6% (const currency) due to sluggish performance by Namaste business.  EBITDA margin expanded 130bps YoY to 16.9% led by lower COGS (-117bps) and other exp. (-54bps). This was offset by higher staff costs (+25bps) and A&P (+16bps). Improved mix and RM tailwind aided COGS. As per the management, EBITDA margins will expand in the coming quarters with the full impact of softening commodity and crude prices. Key segments witness higher growth vs 9MFY15  50% of portfolio (OTC & Ethicals, Hair Care, Home Care, Oral Care) witnessed growth improvement in 3QFY15 versus 9MFY15. Toothpaste grew by 19%, thereby gaining share. Inspite of delayed winter, Health supplements reported a resilient 13.5% growth. Valuations and view  Dabur is trading at 34.7/28.5x our FY16/FY17E EPS. Upgrade to BUY with a TP of Rs 282 (31x FY17E).

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