Dabur's growth potential justifies premium valuation of its stock

Focus on power brands and rural expansion augur well for the stock, trading at 43 times its FY21 estimated earnings

Shares of Dabur, which owns popular consumer brands such as Dabur Chyawanprash, Dabur Honey, and Hajmola, are currently trading at 43 times the company’s FY21 estimated earnings — a 15 per cent premium to its historical five-year average of one-year forward valuation. 

This might appear high against the backdrop of slowing consumption, but Dabur’s measures to sustain healthy growth rates through network expansion, product premiumisation, etc, seem to justify the valuation. 

According to Nitin Gupta, analyst at SBICAP Securities, “Dabur’s premium valuation is justified against the backdrop of its strategy to expand market share with focus on eight core brands and the expansion of its rural distribution.”

Dabur has identified eight power brands — Chyawanprash, Honey, Lal Tail, Honitus, Pudin Hara, Red Paste, Amla, and Real juice — for an enhanced focus, with the aim to gain market share through product innovation, premiumisation and low-unit packs. This is likely to provide volume traction to Dabur, given the power brands account for around 65 per cent of its domestic revenues.

Further support will come from Dabur’s efforts to increase its footprint in the hinterland, which accounts for around 45 per cent of its business. Even in the September quarter (Q2), Dabur added 3,000 villages to its kitty, taking the total rural count to 51,000. 

In fact, at a time when rural demand is weaker than urban, and competition from Patanjali is behind, the rural expansion strategy should augur well for the company. 

Unlike other major fast-moving consumer goods (FMCG) players such as Hindustan Unilever that witnessed rural business growth underperforming urban in the September quarter, Dabur reported 6 per cent rural growth, against 3 per cent urban growth. This also helped Dabur gain market share in most of its product categories in the quarter.

Going ahead, the company aims to focus on higher volume growth without an adverse impact on its operating profit margin. 

In the near term at least, expected benefits from benign input costs are likely to be ploughed back in promotional activities to push volumes. 

Dabur aims to clock mid to high single-digit volume growth in FY20 and an operating profit margin of around 20 per cent, against 21 per cent in first half of the current financial year.

On the whole, the company’s structural growth story looks strong, and despite its premium valuations, many analysts see a potential upside of 11-18 per cent for the stock from its current level.