Analysts remain upbeat on Dabur despite decline in Q3 numbers

Expected pickup in urban demand, new launches and distribution network expansion are the reasons for their optimism

Despite the margin decline reported by Dabur in the December quarter, a key reason the stock fell 3.5 per cent on Wednesday, analysts remain positive on the company.

Strong performance in its international business and a good show by most categories in the domestic business boosted Dabur’s December quarter results. The reason for bullishness is analysts expect the performance to remain strong, led by expected pick-up in urban demand, new launches and distribution network expansion (to aid volume growth) and better profitability.

Of the 23 analysts polled by Bloomberg in January so far, 14 have a ‘Buy’, eight a ‘Neutral’ and one a ‘Sell’ rating on the scrip. Their average target price stands at Rs 180, indicating 11 per cent upside from current level of Rs 162. Current valuations are lower (PE of 27 times FY15 earnings) than the peak one-year forward PE of about 33-34 times.

FUTURE PLANS

• Dabur is looking to double its channel of chemists to 150,000 by FY15 in its bid to grow the high-margin-lower-competition health care business
• The company also plans to distribute its personal care products via this channel. Consequently, the company's volume growth could hover around 10 per cent
• Management expects consumers to shift from coconut oils to light hair oils. This portfolio is likely to grow in high single-digit while shampoo growth is expected to be 15-18 per cent

In a after results call, management indicated that urban demand may have bottomed out, citing that Nielsen data and the company's own growth numbers show a gradual recovery in November and December.

Dabur is also looking to double its chemists channel to 150,000 by FY15 in its bid to grow the high margin-lower competition healthcare business. It also plans to distribute its personal care products via this channel. Consequently, the company's volume growth could hover around 10 per cent going forward.

While gross margins are likely to be under pressure in the March quarter, it should improve in FY15, believe analysts.

“Gross margins may not expand in Q4 (FY14) as Dabur has some high cost inventory till February, but over FY15 there should be 100 basis points improvement from better product mix alone. Ad spend will likely range between 14 and 14.5 per cent in FY15, as the company has many new launches in the coming year,” says Arnab Mitra, FMCG research analyst at Credit Suisse. Pick-up in international business’ margins could also benefit overall margins.

“Dabur is well placed in the consumer space with differentiated offerings and its investments in future growth drivers,” says Abneesh Roy, associate director, institutional equities, research, Edelweiss Securities. He has a ‘Buy’ rating on Dabur with a target price of Rs 218.

Meanwhile, consolidated revenues stood at Rs 1,904 crore, up 16.8 per cent and net profit was up 15.7 per cent to Rs 244 crore. Strong performance of domestic business (up 14.4 per cent, led by volume growth of nine per cent) as well as international business (30 per cent of revenues, up 26 per cent) fuelled topline growth. Notably, the revenue growth was its highest since the past five quarters (12-15 per cent). Strong traction in Namaste business, Egypt, Gulf Cooperation Council and Nigeria led to the strong performance of international business.

Higher ad spends (up 80 basis points to 13.5 per cent of sales) resulted in Ebitda (operating earnings) margin compression of 40 basis points to 16.5 per cent, mainly due to six new product launches. Analysts expect ad spends to normalise in coming quarters.

“Dabur is in a sweet spot with volume growth outpacing most peers, innovation and aggressive distribution drive. We expect ad-spend to normalise in FY15 as new launches will be spaced out,” adds Abneesh Roy.

Amongst its key categories, shampoos registered highest growth of 25 per cent, followed by health supplements (chyawanprash, honey) which grew by 19.5 per cent. Foods and digestives (Pudin Hara, Hajmola) grew by 18 per cent each. While Home care growth moderated to 16 per cent driven by weakness in Odomos, decline in coconut oils led to a modest seven per cent growth in hair care portfolio.

Management expects consumers to shift from coconut oils to light hair oils. This portfolio is likely to grow in high single-digit, while shampoo growth is expected to be around 15-18 per cent.