PRIVATE CLIENT RESEARCH
INITIATING COVERAGE
MARCH 24, 2014
Ritwik Rai
ritwik.rai@kotak.com
+91 22 6621 6310
Dabur India Ltd
PRICE: RS.180
TARGET PRICE: RS.201
Stock details
BSE code
:
500096
NSE code
:
DABUR
Market cap (Rs.mn)
:
312,249
Free float (%)
:
31.38
52-wk Hi/Lo (Rs)
:
185/128
Avg. Daily Volume (BSE+NSE)
:
15,97,000
Shares o/s (mn)
:
1738
Summary table
(Rs mn)
FY14E
FY15E
FY16E
Sales
70,575
Growth (%)
14.8
EBITDA
11,608
EBITDA margin (%)
16.4
PBT
11,329
Net profit
9,210
EPS (Rs)
5.3
Growth (%)
19.9
CEPS (Rs)
5.9
Book value (Rs/share) 15.6
Dividend per share (Rs) 1.6
ROE (%)
33.9
ROCE (%)
32.1
Net cash (debt)
(1,470)
NW Capital (Days)
-12
P/E (x)
33.9
P/BV (x)
11.5
EV/Sales (x)
4.4
EV/EBITDA (x)
26.6
81,687
15.7
13,911
17.0
13,753
10,836
6.2
17.7
6.8
19.6
2.0
31.9
32.7
5,276
-8
28.8
9.2
3.7
21.7
94,160
15.3
16,571
17.6
16,886
12,965
7.5
19.7
8.1
24.2
2.4
30.8
33.0
12,549
-2
24.1
7.4
3.1
17.8
Source: Company,
Kotak Securities - Private Client Research
Shareholding pattern
Corporates
2%
Institutions
4%
Public
5%
Foreign
20%
Promoters
69%
Source: ACE Equity
One-year performance (Rel to Sensex)
Source: ACE Equity
RECOMMENDATION: ACCUMULATE
FY16E P/E: 24.1X
 Competitive Portfolio for all times: Dabur India (Dabur) has a well-diversified domestic portfolio, with substantial contribution (c.35%) from niche categories with little competitive pressure. The company has market-leading positions in categories such as fruit juices and home odour solutions (c. 18% of
portfolio). In categories such as oral care, shampoos, and toilet cleaners (c.
20%), Dabur has historically benefited from a consolidating market - which is
our opinion is a long-term positive for players who maintain their market share.
Dabur is the #2 player hair oils, and has a substantial bearing on competitive
activity in the segment. In summary, we think Dabur's revenues are likely to
weather weak industry growth/ high competitive intensity better than peers.
Near-term, we estimate 14.5% CAGR in the company's domestic revenues
through FY14E-FY16E.
 Strong performance in international operations likely, significant opportunity size in acquired brands: During FY13, Dabur's international portfolio has posted weak results on account of business restructuring efforts at
Namaste. The restructuring efforts are now nearing a close, and the business
should begin to register healthy growth, supplementing growth of Dabur's organic initiatives and Hobi group. With large opportunity size in Africa, and
distribution synergies, we see international operations on a strong footing for
the long-term, and expect c.18% revenue growth in international operations
through FY14-FY16, leading up to 15.5% CAGR in overall sales for the company
 Likely to beat sector growth on account of strong brand investments in
recent past, pricing levers available: We believe our growth projections for
Dabur have significant visibility, given: 1/ strong trends in quarterly volume
growth, 2/ significant advertising and promotional spends in recent past, which
should enable volume growth, 3/ availability of pricing levers with the company (Dabur has, as yet, been benefited by c. 5% pricing growth). Dabur's
growth expectations compare favorably with our coverage universe, which is
expected to grow 13.8% CAGR through FY14-FY16E.
 Margin levers available, enabling visibility in earnings: We believe Dabur
has several avenues that can enable margin expansion, which include higher
contribution from margin-accretive categories, and improvement in the international operations' margins. Overall, we factor in 52% gross margins (in -line
with historical averages), and 13-5%-14% advertising spends over the next
two years (well above historical averages). We believe the company is well
placed to manage margins through either the pricing or A&P route, thus providing fairly high earnings visibility.
 Valuations reasonable relative to peers, re-rating likely to sustain; initiate with ACCUMULATE: At CMP, Dabur trades at 24.1x PER FY16E, a
modest discount to peers' average of 25.2x PER FY16E. Dabur trades at 28%
premium to its five-year average NTM PER. The stock is likely to see sustenance of re-rating, backed by earnings visibility. We value the stock at 27x PER
FY16E, translating into price target of Rs 201, over the next 2-3 quarters. Although the upside is limited, the likelihood of the stock outperforming peers is
high, in our opinion. ACCUMULATE.
 Risks: Competitive Intensity, especially in the hair oils and oral care segment,
is a significant risk for Dabur. Also, forex risks relating with fruit juice (domestic
operations) and translation risks arising from the company's international operations. De-rating in FMCG stocks is a further (valuation) risk to the price target.
Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views,
estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited.
INITIATING COVERAGE
March 24, 2014
COMPANY DESCRIPTION
Dabur started out with pharmaceuticals sales in Calcutta in 1884, and has, over the
years, developed significant competencies in the production marketing of ayurvedic
and FMCG products.
Among larger FMCG companies in
India, strong long term track
record with 23% CAGR in
earnings over past decade
Dabur is currently amongst the larger FMCG companies in India, with revenues of
Rs 61 Bn (FY13). Domestic sales contribute 69% to Dabur’s topline. The company
reports its domestic sales under three segments, namely, Consumer Care, Foods,
and Retail. International sales of the company break up, into three parts: sales of
the company’s products in international markets, and acquisitions made in recent
years (Hobi Group and Namaste Laboratories in FY12).
Historical Information
Year
Milestone
1884
Dabur started manufacturing and selling of ayurvedic products, based in
Calcutta
1936
Established Dabur India (Dr. SK Burman) PVt. Ltd.
1986
Established as a Public Limited Company
1994
Public Issue of Shares
2000
Achieved Turnover of Rs 10 Bn
2003
Demerger of Pharma Business
2005
Acquired Balsara
2007
Made a foray in organized retail
2008
Acquired Fem Care Pharma
2010
Made first overseas acquisition
2011
Acquired 30-plus from Ajanta Pharma
2012
Acquired Hobi, Namaste Labs
Source: Company
Dabur has a strong track record of growth. The company has delivered 19% growth
in sales and 23% growth in earnings CAGR over the past ten years. Dabur has
historically held stronger margins than the rest of the FMCG industry in India. It is
our belief that stronger margins are a result of: 1/ Dabur has consciously placed its
products as health and wellness products which command higher brand stickiness
and (therefore) stronger margins, 2/ stronger margins in the hair care segment
(30% of consumer care), and 3/ occupation of useful niche spaces in several areas
(digestives, OTC and ethical, and differential positioning in the oral care and home
care segment).
Dabur India – Revenue Streams
DABUR INDIA LTD
Domestic (69%)
Consumer
Care (55%)
Foods
(11%)
International (31%)
Retail
(1%)
Others
(3%)
Organic
International
(19%)
Namaste Labs
(8%)
Hobi Group
(3%)
Source: Company Presentations
Kotak Securities - Private Client Research
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We note that the organic international business of the company comprises
geographies of Middle - East, North Africa, Pakistan, and Bangladesh. Hobi Group
acquisition, made in FY12, strengthens the group's presence in the MENA region.
Namaste Group acquisition, made in FY12, has sales concentrated in USA (about
70% of total) catering to African-Americans. The organic business of the company
largely comprises of hair oils and oral care. Hobi Group is involved in production and
sales of a range of hair care and skin care products.
Dabur India – Composition of International Revenues (by geography)
Asia
17%
Other
4%
Middle‐East
36%
International operations largely
focused on emerging economies
Africa
21%
US
22%
Source: Company Presentations
Rural sales account for 50% of the domestic sales of Dabur India. The company's
distribution network is amongst the strongest in the industry. Further, the company
has focused on rural sales in the past few quarters (named Project Double), which
has further strengthened the rural capabilities of the company. The company's
domestic sales are concentrated towards North (35%), and Dabur has been making
efforts to improve its reach in the South (15%).
Dabur India - Distribution of Domestic Revenues (by geography)
South
15%
North
35%
Strong distribution network,
reaches about 6 mn outlets,
50% sales from rural India
West
25%
East
25%
Source: Company
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Diversified, competitive = well positioned portfolio for
uncertain environment
In several segments (health supplements, OTC/Ethicals, and digestives), Dabur faces
few competitive threats. Foods (largely juices) and odour solutions (part of home
care in the pie-chart below) are high-growth categories in which Dabur is the
market leader. While Dabur is well behind market leader in oral care, shampoos
(part of hair care in the pie-chart below) and oral care categories, the company
either occupies niche spaces (herbal care, in the case of oral care and shampoos),
or has generally been able to hold its market share in spaces where gross margins
have seen strength (due to rising market concentration). We see oral care and hair
care (especially hair oils) as categories that could see significant competitive
pressures. But even in these spaces, risks are, to an extent, offset by brand strength
of the company (Dabur is #3 in oral care category, and # in value added hair oils).
Product portfolio of Dabur well
positioned, in a combination of
niche, high growth, consolidating
markets
This is one of the reasons we are positive on Dabur India - 1/ the company's
diversified, competitively positioned product portfolio enables high visibility in
growth, and 2/ the company shall have an opportunity to concentrate on areas of
strength, if and when either FMCG sector growth continues to remain weak, or
when competition heats up in certain categories.
Break-Up of Domestic Revenues (%)
Foods
16%
Hair Care
25%
Digestives
6%
Skin Care
6%
Health Supplements
18%
Home Care
5%
OTC/ Ethicals
10%
Oral Care
14%
Source: Company Reports, Kotak Securities – Private Client Research
Kotak Securities - Private Client Research
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Product Portfolio and Competitive Position – Dabur India
Category
Product
Brand
Health Supplements
Chawanprash
Dabur Chyawanprash
#1
Honey
Dabur Honey
#1
Glucose
Glucose - D
#2
Hajmola, Pudin Hara
#1
#1
Digestives
Position
OTC/ Ethicals
baby Care
Lal-Tail
Cough and Cold
Honitus
Hair Care
Hair Oils
(various)
#2
Shampoos
Vatika
#4
Toothpastes
Dabur Red
#3
Oral Care
Meswak
Babool
Home Care
Skin Care
Toothpowder
Dabur Red
#2
Air Freshner
odonil
#1
Mosquito Repellant Cream
odomos
#1
Toilet Cleaner
SaniFresh
#2
Skin Bleaches
Fem, oxybleach
#1
Rose Water
Gulabari
Creams and Lotions
Foods
Juices
Real
Culnary
Hommade
#1
Source: Company
We believe it is a result of the strong competitive position of the company that
Dabur is able to extract higher EBITDA margins than the rest of the industry.
Moreover, the margin profile of the company has remained fairly consistent over
the past several years.
Stable EBITDA Margins over the years – Dabur India
20
Dabur’s margins are stronger
than several peers, and have
been relatively stable over the
long term
16
12
8
4
0
Source: Company Data – Kotak Securities – Private Client Research
Dabur’s strongly positioned brand portfolio, as also the company’s consistency in
margins over the past decade, lead us to believe that Dabur may be well-positioned
to beat industry growth over the next few quarters, leading to stock
outperformance.
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Expect Robust Revenue Growth through FY14-FY16; high visibility in
revenue growth
Drivers of domestic revenue growth of Dabur include, apart from secular growth in
consumption, : 1/ penetration-led growth in categories where Dabur has taken
significant position (odour solutions, fruit juices, skin care, shampoos), 2/ Dabur’s
strong brand equity in the OTC/ Ethicals and healthcare space, 3/ strengthening
distribution of Dabur, which includes successfully concluded ‘Project Double’, which
enhanced distribution in rural India, and ongoing ‘Project Core’ which entails
improvement of penetration in chemist stores. Besides these, Dabur has been
steadily gaining ground in South India, which has traditionally been one of the
weaker geographies for the company.
In the international operations, Dabur has maintained strong growth in its IBD
division. However, growth in the Namaste business has been significantly impacted
in the recent past (largely FY13) on account of distribution and branding changes
made by Dabur over the course of the year. The company believes that growth in
Namaste business should return, with stronger growth in African markets over the
long term.
Revenue Model, Dabur India
Rs mn, FY Ends Mar
Expect 15.5% CAGR in domestic
FMCG sales (FY14-16) and 17.7%
CAGR in international operation
leading to 15.5% CAGR in net
sales over FY14-16
Net Sales
-Domestic (FMCG) Sales
-Consumer Care Division
- Hair Care
FY13
FY14E
FY15E
FY16E
61,467
70,575
81,687
94,160
40,138
45,920
52,604
60,223
33,499
37,953
43,203
49,130
10,050
10,887
12,194
13,779
- Health Supplements
7,035
8,321
9,569
10,956
- Oral Care
5,695
6,433
7,108
7,819
- OTC and Ethicals
4,020
4,482
5,289
6,241
- Home Care
2,345
2,837
3,405
4,017
- Skin Care
2,010
2,320
2,671
3,053
- Digestives
2,345
2,673
2,967
3,264
6,638
7,967
9,401
11,093
18,747
22,637
26,793
31,364
-Foods (beverages)
-International Sales
-IBD
12,308
14,910
17,743
20,936
-Namaste Labs
4,990
5,988
7,006
8,056
-Hobi Group
1,450
1,740
2,045
2,372
2,582
2,018
2,291
2,572
-Other
Source: Company, Kotak Securities - Private Client Research
Kotak Securities - Private Client Research
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Growth Assumptions
Growth, %
FY13
FY14E
FY15E
FY16E
16.3%
14.8%
15.7%
15.3%
10.7%
14.4%
14.6%
14.5%
12.2%
13.3%
13.8%
13.7%
- Hair Care
13.2%
8.3%
12.0%
13.0%
- Health Supplements
18.9%
18.3%
15.0%
14.5%
- Oral Care
13.2%
13.0%
10.5%
10.0%
- OTC and Ethicals
13.2%
11.5%
18.0%
18.0%
- Home Care
32.1%
21.0%
20.0%
18.0%
- Skin Care
13.2%
15.4%
15.2%
14.3%
Net Sales
-Domestic (FMCG) Sales
Hair care likely to report
improved growth from low base,
strong growth in low penetration categories to
continue on high growth path
-Consumer Care Division
- Digestives
-Foods (beverages)
-International Sales
-IBD
-0.9%
14.0%
11.0%
10.0%
27.1%
20.0%
18.0%
18.0%
17.8%
20.7%
18.4%
17.1%
32.4%
21.1%
19.0%
18.0%
15.0%
-Namaste Labs
-9.3%
20.0%
17.0%
-Hobi Group
29.0%
20.0%
17.5%
16.0%
296.2%
-21.8%
13.5%
12.3%
-Other
Source: Kotak Securities – Private Client research
In building our revenue expectations, we note:
1/ hair care segment, critical to the Consumer Care Division (CCD), has seen
significant moderation in growth in recent quarters. The weakness is largely
attributable to hair oils, where industry growth has weakened (de-growth in the
coconut oil business , which accounts for 20% of Dabur's hair oil sales). Longer term, management has guided for a 10-12% growth in hair oils and 20% growth in
shampoos (about 20% of hair care). We model for 12%/13% growth in FY15/
FY16.
2/ other segments are likely to maintain historically observed growth rates, with key
growth areas being skin care (gains in market share), foods (category growth), and
home care (market share gains, sustenance in leadership in toilet/ home freshness
segment). Within skin care we note that the moisturizer segment is the only one
with significant size to affect overall growth of the company. We expect continued
strength in home care (strong industry growth, Dabur the leading player in
freshners), and foods (strong industry growth, rising rural penetration)
Expect 14.5% CAGR in domestic
business (management has
guided for 8-12% growth in
volumes over next few quarter)
3/ We expect continued strength in organic international operations of the
company. In the Namaste operations, we note that Dabur has been helped
substantially in FY14 on account of translation benefits. While these are not likely to
last, we expect strength in Namaste to be driven by non-US operations. Hobi Group
is likely to continue reporting strong growth in the near future with improvements in
distribution as well as strong innovations.
Net - net, we expect the company to report 15.5% growth CAGR for FY15/FY16,
with international operations growing at 17.5% CAGR and domestic sales growing
at 14.5% CAGR. We note that the company has guided that in domestic
operations, the company shall likely register 8-12% volume growth in the coming
quarters.
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We estimate 18.5% CAGR in earnings growth, among highest in our
coverage universe
Profit Model, Dabur India
Rs mn, FY Ends Mar
FY13
FY14E
FY15E
FY16E
Net Sales
61,467
Growth, %
16.3%
Raw Material Expenses
30,194
Gross Profit
31,273
Gross Margin
50.9%
Advertising and Promotional Expenses 8,370
- as % sales
13.6%
Personnel Expenses
4,712
Other Expenses
8,188
EBITDA (excl. other op. income)
10,003
Margin, %
16.3%
Depreciation and Amortization
1,124
EBIT
8,879
Other Operating Income
294
Other Income
945
Interest Expenses
589
PBT
9,530
Minority Interest/ Associate
(24)
Provision for Tax
1,826
PAT
7,634
Net Margin
12.4%
Shares Outstanding
1,738
EPS
4.39
70,575
14.8%
33,950
36,626
51.9%
9,881
14.0%
6,053
9,263
11,429
16.2%
1,006
10,423
179
1,215
488
11,329
33
2,153
9,210
13.0%
1,738
5.30
81,687
15.7%
39,299
42,388
51.9%
11,191
13.7%
7,022
10,522
13,653
16.7%
1,023
12,630
258
1,304
438
13,753
40
2,957
10,836
13.3%
1,738
6.24
94,160
15.3%
45,241
48,919
52.0%
12,712
13.5%
8,075
11,871
16,261
17.3%
1,116
15,145
309
1,647
214
16,886
47
3,968
12,965
13.8%
1,738
7.46
Source: Company Reports, Kotak Securities – Private Client research
In building our profit estimates for Dabur, we take special note of the following:
We model for c.52% gross
margin through FY14 to FY16, in
line with historical averages
1/ Our estimates incorporate maintenance of gross margins at ~52%. We note that
Dabur has, by and large, maintained this level of gross margin in the past decade.
Dabur's key raw materials are difficult to model for individually, given the variety in
the company's product portfolio - some of the raw materials consumed by the
company are coconut oil, amla green, sorbitol, liquid paraffin, paradichlorobenzene,
and fruit pulp . Given the difficulty in predicting raw material price affects, we rely
primarily on historical data, which suggests that the company is able to extract a
gross margin of roughly 50-53% for its portfolio (gross margins, here and elsewhere
in the report, are calculated using net sales rather than total sales from operations,
in the denominator).
Long-Term Gross Margin Trajectory, Dabur India (%)
55
54
53
52
51
50
49
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14E FY15E
Source: Company Reports, Kotak Securities – Private Client research; Note: Gross margins
above are computed as (1-raw material expenses/ net sales)
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We believe that the company has utilized pricing levers to a limited extent, and
would have the ability to raise prices, in case the raw material prices rise.
We factor in continued elevation
in A&P spends as % of sales
leaving a key lever of margin
management
2/ In FY13, Dabur responded to weakness in volume growth in several categories by
strong innovation and a series of re-launches. The company restaged more than
half of its portfolio, which raised the advertising and promotion spends to 13.6%.
Advertising and Promotional expenses as a percentage of sales have been modeled
to remain at elevated levels (est. 14% of sales in FY14). We believe a significant
part of Dabur's portfolio maybe, in case of weaker competitive intensity (triggered
by weaker demand as also specific reduction in media intensity/ promotional spends
in the oral care category), curtailed significantly as a percentage of sales. We
believe we are factoring in reasonably elevated levels in A&P spends; the company
may be in a position to reduce A&P expenses more aggressively if industry growth
continues to be moderate, or competition contained.
Dabur, A&P Spends as % Sales
15
14
13
12
11
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13 FY14E FY15E
Source: Company reports, Kotak Securities – Private Client Research
3/ Our estimates factor in cost savings of 0.5 ppt over the next two years, on
account of supply chain improvements, cost efficiencies and operating leverage. As
a result of the decline in A&P spends as percentage of sales and costs savings, we
factor in margin improvement of 50 bps. Our base case forecast for Dabur is a fairly
robust 50bps gain in the EBITDA margin in FY15. Over FY14-FY16, our estimates
suggest a still robust operating profit growth of 19%.
4/ Segment-wise, long term margin expansion process may be looked at in the
following way - a/ Dabur's gross margins have declined over the past few years on
account of higher growth in lower-margin categories. Going forward, the company
has indicated that it would seek to garner higher growth in categories that have
higher margins, such as home care, health care, and personal care. Further, b/
international operations of the company are likely to see benefits of improving
margins from Namaste operations (cost restructuring initiatives taken by the
company, also improving revenue growth and operating leverage gains).
Expect 18.5% CAGR in earnings
to FY14 to FY16
Kotak Securities - Private Client Research
5/ As a result of healthy cash generation, the company shall generate significantly
higher net financial income in the coming years, which has a further positive impact
on profits before tax. Given that effective tax rate (as per guidance) is likely to be in
the range of 22-24%, Dabur is likely to register a 18.5% growth in EPS over FY14E
-FY16E. This expectation places Dabur India well ahead of competitors in terms of
EPS growth, suggesting a possibility that Dabur may be able to outperform peers.
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Expect strong cash flow, improving RoIC on higher asset
turns
In FY12, the company has registered a significant rise in invested capital on account
of acquisitions, and further FY13 has seen Namaste growth affected by restructuring
of operations. Since the company’s capex plans are modest, we expect that (in
absence of significant acquisitions), the company should register improved RoIC
going forward, helped by rising asset turnover and higher margin.
Invested Capital (Rs mn, FY ends Mar) and ROIC (%) – Dabur India
75
Invested Capital (RHS)
32,000
ROIC (LHS)
60
24,000
45
16,000
30
8,000
15
0
0
FY12
FY13
FY14E
FY15E
FY16E
Source: Kotak Securities – Private Client Research
We expect strong cash generation for Dabur, leading to potential for improved
dividend payout/ search for new opportunities (organic/ inorganic).
Strong Cash Generation to continue, improving balance sheet (Rs mn)
16,000
12,000
Gross Cash Flows
Free Cash Flow
8,000
4,000
0
FY12
FY13
FY14E
FY15E
FY16E
Source: Kotak Securities – Private Client Research
Movements in Earnings Expectations, Correlation Between FMCG
stocks indicate a possibility for outperformance
The table below shows correlation of annual returns (starting from 1997) among
FMCG stocks. We believe the same can be useful to understand whether Dabur has
potential, at least in the short – term, to perform ahead of the sector in an
environment where we think that risks to the sector, both on earnings and
valuations, are high.
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Correlation matrix: annual returns of FMCG stocks
Dabur India
Dabur India
Colgate
HUL
ITC
GSK
Nestle
Marico
TGBL
Britannia
100%
Colgate
43%
100%
HUL
38%
32%
100%
ITC
19%
49%
37%
100%
GSK
48%
65%
32%
63%
Nestle
43%
43%
20%
57%
83%
100%
Marico
44%
62%
3%
53%
54%
55%
TGBL
52%
58%
51%
68%
51%
28%
58%
100%
Britannia
41%
-18%
28%
44%
44%
41%
16%
33%
100%
100%
100%
Source: Bloomberg, Kotak Securities - Private Client Research
As should be expected Dabur’s historical stock performance has had a helthy
correlation with FMCG stocks in general. However, we note that correlation of
Dabur with FMCG stocks in general is weaker than several peers.
Earnings-related risks also depend on whether estimates incorporate high
expectations. To that extent, we believe recent downgrades can indicate whether
earnings expectations have been high. In the chart below, we examine the earnings
downgrades from past 18-24 months' peak, of FY2015 estimates. Dabur has, in
recent months stood well against the downgrades that have been seen in the sector
in general.
Earnings downgrades versus recent peak
Bajaj Corp
Colgate Palmolive India
Netsle India*
Godrej Consumer
Marico
Hind. Unilever
Jyothy Laboratories
Dabur India
GSK Consumer*
‐25%
‐20%
‐15%
‐10%
‐5%
0%
Source: Bloomberg (consensus estimates), Note: The above is a compilation of declines of
FY15 estimates from peaks that have been observed in the past 24 months
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Recent Trends and Near-Term Outlook
Quarterly Financials, Dabur India Ltd
Rs mn, FY Ends Mar
1QFY13
2QFY13
3QFY13
4QFY13
1QFY14
2QFY14
3QFY14
Net Sales
14,620
15,226
16,307
15,311
16,511
17,488
19,043
Growth, %
21.4%
20.6%
12.3%
12.3%
12.9%
14.9%
16.8%
Raw Material Expenses
7,316
7,525
7,954
7,399
8,074
8,072
9,275
Gross Profit
7,303
7,701
8,354
7,912
8,437
9,416
9,768
Gross Margin
50.0%
50.6%
51.2%
51.7%
51.1%
53.8%
51.3%
A&P Expenses
2,292
1,808
2,351
1,919
2,542
2,275
2,896
15.7%
11.9%
14.4%
12.5%
15.4%
13.0%
15.2%
1,122
1,286
1,230
1,209
1,313
1,588
1,580
% of sales
Personnel Expenses
Other Expenses
1,845
2,055
2,081
2,181
2,228
2,315
2,366
EBITDA
2,044
2,552
2,693
2,603
2,355
3,238
2,925
Margin, %
14.0%
16.8%
16.5%
17.0%
14.3%
18.5%
15.4%
267
196
305
281
287
236
255
1,777
2,357
2,387
2,322
2,068
3,003
2,670
93
49
53
126
54
54
50
Other Income
263
243
220
230
366
226
339
Interest Expenses
213
149
78
150
133
200
72
1,921
2,500
2,582
2,527
2,355
3,083
2,988
378
464
478
507
484
579
546
1,543
2,036
2,105
2,021
1,870
2,504
2,442
Depreciation and Amortization
EBIT
Other Operating Income
PBT
Provision for Tax
PAT
Source: Company
The company has experienced moderate growth in revenues over the past few
quarters. Even so, Dabur’s growth is commendable in the current environment.
Further, we think the company may have some pricing levers in certain categories
which could help sustain revenue growth in case of continued slow down.
The volume growth for Dabur has been weaker than prior expectations of the
company/ investor community. However, volume growth of the company remains
higher than industry averages, which is a positive.
Dometic Volume Growth, Dabur India (%, y/y)
Dabur has shown strong volume
growth trends, considering
industry slow down over the past
few quarters
Source: Company Reports
In recent quarters, the company has also registered a robust growth in international
operations, post a lull in Namaste operations, and weakness in certain other
geographies.
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Dabur, Growth in International Operations (y/y, %)
30
25
20
15
10
5
0
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Source: Company Reports
Gross margins of the company have been fairly strong in the past two quarters, on
account of benign raw material costs. The management has indicated that the
same shall not be sustainable. However, our outlook on the operating margin of the
company remains strong on the back of potential for reduction in advertising and
promotional expenses, which have remained on the higher side for 9MFY14.
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VALUATION
Dabur India NTM P/E Band Chart
31x
200
(Rs)
28x
25x
160
22x
Valuations at elevated levels
versus recent history, modest
discount over peers
120
80
40
A-09
J-10
O-10
J-11
A-12
J-13
O-13
Source: Bloomberg, Kotak Securities - Private Client Research
Comparative valuation
Britannia*
CMP
Mkt. Cap.
Rs.
Rs Bn
Sales Grw (%, y/y)
EPS (Rs)
ROE
FY15
FY16
FY15
EPS Grw. (%, y/y)
FY16
FY15
FY15
FY15
PER (x)
FY16
863
103
14.4
15.2
17.2
20.5
37.5
46.2
23.0
19.1
1348
183
15.1
15.0
14.8
14.7
43.0
95.5
31.3
27.3
Dabur India
180
312
15.7
15.3
17.7
19.7
6.2
30.8
28.8
24.1
Godrej Consumer
764
260
14.8
12.0
21.5
21.9
25.9
20.2
29.5
24.2
GSK Consumer*^
4316
182
22.3
6.2
23.3
7.6
147.4
35.0
29.3
27.2
574
1240
11.5
11.0
19.4
15.0
18.3
72.3
31.4
27.3
ITC
357
2788
11.1
12.0
10.1
10.4
12.3
39.0
28.9
26.2
Marico Ltd.
209
134
15.9
13.0
8.3
15.0
8.5
18.7
24.7
21.5
4777
461
13.8
14.2
17.0
17.1
135.4
46.0
35.3
30.1
629.4
14.9
12.7
16.6
15.8
48.3
45.1
29.1
25.2
Colgate India*
Hindustan Unilever
Nestle India*^
Average
Source: Bloomberg, Kotak Securities – Private Client Research* Not Covered, Bloomberg Consensus Estimates, ^FY Ends Dec, FY15 and
FY16 refer to CY14 and CY15 respectively
Initiate with ACCUMULATE,
price target Rs.201
Kotak Securities - Private Client Research
At CMP, Dabur trades at 24x FY16 PER. The same compares favourably with peer
group. Given our earnings growth expectations, we also think Dabur is more likely
to sustain the re-rating it has experienced over the years. We value Dabur India at
27X FY16E PER, or Rs 201. While upside is limited, we believe there is a high
possibility of Dabur beating performance of its peer group. ACCUMULATE.
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RISKS
 Sharper than expected weakness in consumption expenditures: So far,
Dabur has bucked the trend in FMCG sector de-growth on account of the resilience that the copmany’s portfolio has shown, as also strong international
growth. The management of Dabur has expressed hope that the FMCG industry
is likely close to bottoming out, in terms of growth. Even so, persistence of
weakness in FMCG growth shall have, sooner or later, an impact on Dabur India.
FMCG Industry Growth (%, y/y)
18
16
14
12
10
8
6
4
2
0
Source: Company Presentations
 Raw Material prices and forex risks: While Dabur is relatively insulated from
adverse movements in INR, the company’s beverages business is significantly
dependent on imports. Given rising competition in the space, it remains a possibility that Dabur may face pressure on its gross margins in the coming quarters.
 De-rating in consumer staples: As highlighted earlier in the report, it is not
unlikely that the industry shall face significant demand pressures in the coming
quarters, as the pace of transfer payments must decline, given India’s grim fiscal
situation. As of now, the declines in FMCG stocks has largely been led by earnings downgrades. Further downgrades/ lowering of expectations relative to the
broad economy may lead to a de-rating in the sector. As we may see from the
chart above, Dabur’s current valuations are well above historical averages. As
such, the prospect of de-rating remains high, even if Dabur is able to meet earnings expectations.
 Competitive Risks: We believe that hair care and oral care businesses of the
company, which have significantly higher gross margins than the rest of the
company’s domestic business, could see pricing pressures. This is especially true
in the hair oils business, where the company’s products are priced (in some
cases, e.g., Dabur Amla) at significant premium to competition.
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FINANCIALS
Profit and Loss Statement
(Rs mn)
Balance sheet
FY13
FY14E
FY15E
FY16E
(Rs mn)
61,467
70,575
81,687
94,160
Paid - Up Equity Capital
16.3
14.8
15.7
15.3
10,298
11,608
13,911
16,571
15.7
12.7
19.8
19.1
Depreciation
1,124
1,006
1,023
1,116
EBIT
9,174
10,602
12,888
15,454
15.7
12.7
19.8
19.1
356
727
865
1,432
9,530
11,329
13,753
16,886
20.6
18.9
21.4
22.8
1,826
2,153
2,957
3,968
as % of EBT
19.2
19.0
21.5
23.5
Net Income
7,634
9,210
10,836
12,965
% change yoy
19.6
19.1
17.6
19.7
Shares outstanding (m)
1738
1738
1738
1738
EPS (Rs)
4.4
5.3
6.2
DPS (Rs)
1.4
1.6
2.0
CEPS(Rs)
5.1
5.9
BVPS(Rs)
12.2
15.6
Revenues
% change yoy
EBITDA
% change yoy
% change yoy
Net Interest
Earnings Before Tax
% change yoy
Tax
FY13
FY14E
FY15E
FY16E
1,743
1,743
1,743
1,743
Reserves
19,622
25,482
32,286
40,344
Net worth
21,364
27,225
34,029
42,087
Borrowings
5,399
3,399
1,399
0
854
854
854
7,443
8,701
11,190
12,899
Other Current Liabilities
12,302
11,302
11,002
11,002
Total Current Liabilities
19,745
20,003
22,192
23,901
47,365
51,482
16,745
17,239
17,716
18,100
Investments/ Assoc
1,305
1,305
1,305
1,305
Other Non-Current Assets
3,285
3,785
4,285
4,785
Inventory
8,439
9,668
11,190
12,899
Debtors
4,841
5,221
6,043
6,965
Cash and Bank Balances
5,128
6,544
9,789
14,164
7.5
Current Investments
5,014
5,014
5,014
5,014
2.4
Loans & Advances
2,015
2,127
2,462
2,838
6.8
8.1
Other Current Assets
593
580
671
774
19.6
24.2
Current Assets
26,030
29,153
35,169
42,653
Total Assets
47,365
51,482
Source: Company, Kotak Securities - Private Client Research
Other Non-Current Liabilities 856
Creditors
Total Liabilities
Net Fixed Assets
58,474 66,842
58,474 66,842
Source: Company, Kotak Securities - Private Client Research
Cash Flow Statement (Rs mn)
(Rs mn)
FY13
FY14E
FY15E
FY16E
Pre-Tax Profit
9,530
11,329
13,753
16,886
Depreciation
1,124
1,006
1,023
1,116
Change in WC
1,688
(1,949)
(1,081)
(1,901)
Cash Taxes Paid
(1,738)
(2,153)
(2,957)
(3,968)
Other
(1,841)
-
-
-
8,763
8,234
10,738
12,133
Operating Cash Flow
Ratio Analysis
FY13
FY14E
FY15E
FY16E
EBITDA margin (%)
16.8
16.4
17.0
17.6
EBIT margin (%)
14.9
15.0
15.8
16.4
Net profit margin (%)
12.4
13.0
13.3
13.8
Adjusted EPS growth (%)
19.1
19.9
17.7
19.7
28.7
27.0
27.0
27.0
3.7
4.2
4.7
5.3
Interest coverage (x)
15.6
21.7
29.4
72.1
Net Debt/ Equity (%)
30.1
5.4
-15.5
-29.8
Margins and Growth:
Balance Sheet Ratios:
Change in Investments
Capex
Investment cash flow
Changes in Equity
Changes in debt
(412)
-
-
-
(1,189)
(1,500)
(1,500)
(1,500)
(3,256)
(1,502)
Fixed Assets Turnover (x)
-
-
-
-
(1,790)
(2,000)
(2,000)
(1,399)
ROE (%)
36.2
33.9
31.9
30.8
(3,992)
(4,860)
ROIC (%)
45.8
50.2
58.3
68.0
(5,992) (6,259)
ROCE (%)
29.7
32.1
32.7
33.0
5.1
4.4
3.7
3.1
Other Financing Cash Flows (2,773) (3,316)
CF from Financing
(1,500) (1,500)
Receivables (days)
(4,563)
(5,316)
Return Ratios:
Multiples:
Change in Cash
944
1,416
3,245
4,374
EV/ Sales (x)
Opening Cash
4,184
5,128
Closing Cash
5,128
6,544
6,544
9,789
EV/EBITDA (x)
30.5
26.6
21.7
17.8
9,789
14,164
Price to earnings (x)
40.7
33.9
28.8
24.1
Source: Company, Kotak Securities - Private Client Research
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