Nepal resolution, rural growth to spur Dabur

Valuation discount versus HUL likely to reduce as growth across categories bounces back

Weakening volume growth in the past two quarters coupled with intensifying competition from Patanjali have weighed on Dabur India’s (Dabur) scrip in recent months. The blockade on Nepal border had hit the supply of Real fruit juices and pulled down the overall volume growth in the past two quarters. After growing at 7-8 per cent year-on-year levels for the past many quarters, Dabur’s volume grew only 5.5 per cent in the September 2015 quarter and fell 2.5 per cent in the December 2015 quarter. This was followed by a cut in earnings’ estimates for the company by most brokerages.

As a result, Dabur’s valuation discount to HUL has almost doubled to 19 per cent. Notably, given its smaller size, the Dabur scrip has historically traded at 10 per cent valuation discount to HUL. Currently, Dabur trades at 33 times FY17 estimated earnings, while HUL trades at 41 times. However, analysts believe this trend is likely to change going forward.

“With Dabur expected to report normalcy in growth from Q1FY17, driven by revival in juice segment, better performance from Namaste (personal care), the valuation gap with HUL will reverse to the average discount of about 10 per cent,” says Anand Mour, fast-moving consumer goods analyst at ICICI Securities.

This is largely due to two factors. One, the Nepal issue was resolved in the March 2016 quarter itself and the full quarter impact will be visible from the June 2016 quarter. Thus, analysts expect volume growth to return to the eight per cent levels witnessed till the June 2015 quarter sooner than later. Second, although Patanjali is a serious threat given Dabur’s high category overlap with Patanjali, Dabur will continue to focus on innovations as well as competitive pricing to protect its market share. Patanjali’s success will also fuel expansion of the naturals market in India and aid players such as Dabur going forward.

While the Namaste acquisition (seven per cent of consolidated revenues) has been growing at a healthy pace, the management believes its margins, too, will expand in FY17. Due to these positives, consensus Bloomberg estimates peg Dabur’s revenue and net profit growth at healthy levels of 13 per cent and 15 per cent, respectively, in FY17.

Although the company is likely to recover some of the lost ground in the March 2016 quarter, the management commentary on demand trends in rural markets (45 per cent of domestic revenues) will be watched closely. Its non-juice businesses such as oral care, OTC and ethicals, digestives, hair care, home care continue to do reasonably well so far and the trend will be similar going forward, as the company expands its distribution footprint. In this backdrop, most analysts remain positive on Dabur.