Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision. Turning healthier Dabur was the worst performing FMCG stock YTD, up 2% vs 25% for FMCG. Our thesis that Dabur was worst hit by demonetisation given rural skew and lower market share in core categories has played out (volume fell 2.6% vs 1% growth for FMCG; 2HFY17). We turn BUYers as we believe: 1) worst of demonetisation is over; 2) new launches across categories in 2H will revive sales growth; 3) margins will improve as better category mix and margin turnaround in juices offset impact of higher A&P spend. Valuations add comfort; Dabur’s 29x FY19E P/E is 20% below sector average despite comparable EPS CAGR of 18% for FY17-20E. Key risks: GST-led disruption and delay in new launches. Competitive position: MODERATE Changes to this position: NO CHANGE Demonetisation is now behind; higher rural salience could aid Dabur High rural salience that was an issue during demonetisation could become a positive. Key reasons: (i) stronger demand recovery in rural India due to high wage inflation; (ii) a good monsoon will support demand recovery in rural India; (iii) under GST, disruption in the urban wholesale channel (15% of sales) will be higher as more players enter the tax net as sales cross tax threshold. Launch of OTC pharma range could transform earnings trajectory Dabur should launch OTC Ayurveda products in 2HFY18 targeting diabetes, weight management, arthritis, cardio, stress management etc. Extensive pre- launch work has been done on product R&D, clinical trials, doctor scoping and doubling of pharmacy reach to establish credibility and access for the products. Earnings trajectory could transform given: 1) large size and rapid growth of these categories and 2) high pricing power and profitability derived from functional, need-based nature of the products. We raise FY17-20E EPS CAGR from 16% to 18% and long-term peak EBIT margin to 25% (vs 20%). F&B and international businesses are potential turnaround cases Dabur’s international business (32% of sales) should revive from its current slump as MENA recovers from a low base as the geo-political situation stabilizes and African expansion of Namaste takes off. Also, F&B (13% of profits) should post a margin turnaround given scale efficiencies from newly set up facilities in India and Sri Lanka for sourcing of fruit juices. Dabur’s 20% discount to sector valuation appears unjustified Dabur’s valuation discount to sector widened from an average of 10% in the past 5 years to 20% given recent share price weakness. Launch of OTC Ayurvedic range could transform Dabur’s earnings trajectory and drive a re- rating. Our DCF-based TP of `330 (`245 earlier) implies 33x FY19E P/E, in line with sector average and supported by 18% EPS CAGR over FY17-20E which is marginally ahead of estimated growth for the sector. CHANGE IN STANCE DABUR IN EQUITY June 13, 2017 Dabur BUY Consumer Recommendation Mcap (bn): `498/US$7.7 6M ADV (mn): `446/US$6.9 CMP: `284 TP (12 mths): `330 Upside (%): 16% Flags Accounting: GREEN Predictability: AMBER Earnings Momentum: RED Catalysts Revival in sales in 2HFY18 Margin gain in F&B Launch of OTC & Ethicals range of products Performance (%) Source: Bloomberg, Ambit Capital Research 90 100 110 120 Jun 16 Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Dabur Sensex Research Analysts Anuj Bansal +91 22 3043 3122 [email protected]Dhiraj Mistry, CFA +91 22 3043 3264 [email protected]Key financials Year to March FY15 FY16 FY17 FY18E FY19E Operating income (` mn) 78,271 84,540 77,014 88,530 102,942 EBITDA (` mn) 13,163 15,198 15,089 17,704 20,895 EBITDA Margin (%) 16.8% 18.0% 19.6% 20.0% 20.3% Adjusted PAT (` mn) 10,657 12,527 12,769 14,604 17,107 Adjusted EPS (`) 6.1 7.1 7.3 8.3 9.7 RoE (%) 35.5% 33.3% 28.4% 28.0% 28.6% P/E (x) 46.9 39.9 39.1 34.2 29.2 Source: Company, Ambit Capital research
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Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Turning healthier
Dabur was the worst performing FMCG stock YTD, up 2% vs 25% for FMCG. Our thesis that Dabur was worst hit by demonetisation given rural skew and lower market share in core categories has played out (volume fell 2.6% vs 1% growth for FMCG; 2HFY17). We turn BUYers as we believe: 1) worst of demonetisation is over; 2) new launches across categories in 2H will revive sales growth; 3) margins will improve as better category mix and margin turnaround in juices offset impact of higher A&P spend. Valuations add comfort; Dabur’s 29x FY19E P/E is 20% below sector average despite comparable EPS CAGR of 18% for FY17-20E. Key risks: GST-led disruption and delay in new launches.
Competitive position: MODERATE Changes to this position: NO CHANGE Demonetisation is now behind; higher rural salience could aid Dabur High rural salience that was an issue during demonetisation could become a positive. Key reasons: (i) stronger demand recovery in rural India due to high wage inflation; (ii) a good monsoon will support demand recovery in rural India; (iii) under GST, disruption in the urban wholesale channel (15% of sales) will be higher as more players enter the tax net as sales cross tax threshold. Launch of OTC pharma range could transform earnings trajectory Dabur should launch OTC Ayurveda products in 2HFY18 targeting diabetes, weight management, arthritis, cardio, stress management etc. Extensive pre-launch work has been done on product R&D, clinical trials, doctor scoping and doubling of pharmacy reach to establish credibility and access for the products. Earnings trajectory could transform given: 1) large size and rapid growth of these categories and 2) high pricing power and profitability derived from functional, need-based nature of the products. We raise FY17-20E EPS CAGR from 16% to 18% and long-term peak EBIT margin to 25% (vs 20%). F&B and international businesses are potential turnaround cases Dabur’s international business (32% of sales) should revive from its current slump as MENA recovers from a low base as the geo-political situation stabilizes and African expansion of Namaste takes off. Also, F&B (13% of profits) should post a margin turnaround given scale efficiencies from newly set up facilities in India and Sri Lanka for sourcing of fruit juices. Dabur’s 20% discount to sector valuation appears unjustified Dabur’s valuation discount to sector widened from an average of 10% in the past 5 years to 20% given recent share price weakness. Launch of OTC Ayurvedic range could transform Dabur’s earnings trajectory and drive a re-rating. Our DCF-based TP of `330 (`245 earlier) implies 33x FY19E P/E, in line with sector average and supported by 18% EPS CAGR over FY17-20E which is marginally ahead of estimated growth for the sector.
Operating income (` mn) 78,271 84,540 77,014 88,530 102,942
EBITDA (` mn) 13,163 15,198 15,089 17,704 20,895
EBITDA Margin (%) 16.8% 18.0% 19.6% 20.0% 20.3%
Adjusted PAT (` mn) 10,657 12,527 12,769 14,604 17,107
Adjusted EPS (`) 6.1 7.1 7.3 8.3 9.7
RoE (%) 35.5% 33.3% 28.4% 28.0% 28.6%
P/E (x) 46.9 39.9 39.1 34.2 29.2
Source: Company, Ambit Capital research
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 2
High rural salience – from bane to boon A key reason for our SELL rating was that Dabur will be hurt the most by demonetisation due to higher salience on the rural market. Our expectation that rural will be hurt more than the urban demand-supply chain has played out. Dabur reported ~2.6% volume decline in 2HFY17 vs the sector’s flat revenues. However, we believe higher rural salience will turn to Dabur’s advantage as: 1) demand recovery in rural India is better than in urban India; and 2) GST could disrupt the urban supply chain more than rural.
Higher vulnerability to demonetisation has played out We believe Dabur’s relative weaker performance during demonetisation is now behind us as availability of cash in the economy has largely stabilised. Going forward, we expect demonetisation to be a non-issue. QoQ recovery in volumes (7.4% for Dabur) also highlights the fact that the worst is behind us. Rural wholesale disruption and weaker market share have hurt Dabur Dabur derives 45% of its sales from rural India. This is the second highest after HUL which through its wide reach also has a high rural salience. Our thesis that played out during demonetisation was that high rural salience is negative because: Rural demand will be impacted more due to job losses as SMEs face existential
crisis due to cash crunch and construction sector (employing~13% of India’s workforce) will also face issues.
Agrarian distress arising out of farmers being forced to sell their crops at low prices due to lower liquidity in the market could hurt farmers.
Supply chain disruption should be higher as rural market is more indexed to wholesale channel due to limited direct reach by companies. Wholesale channel is largely dependent on cash and lack of cash during demonetisation hurt the channel’s ability to operate.
Exhibit 1: Dabur is next to HUL in terms of rural salience
Source: Ambit Capital research
Exhibit 2: Dabur’s reliance on wholesale channel is low
Source: Ambit Capital research
Urban wholesale channel could be disrupted under GST
As we move from demonetisation-related disruption to GST-related disruption, the channel that will now be more impacted is urban wholesale and not rural wholesale. Post GST it is expected that larger organised businesses will have to ride on to the GST Network and therefore their ability to deal in cash or to under report their earnings will get curtailed. Wholesale channel due to its traditional reliance on cash is believed to under report its earnings and thus support its earnings through tax avoidance. It is generally believed that retailers and rural wholesalers, by virtue of their throughput being lower than minimum threshold beyond which filing returns under GST, are likely to remain out of GST’s purview. This is likely to allow them to run their businesses without disruption. However, urban wholesalers by virtue of their large turnover are likely to be a part of GSTN which could cause disruption to their business model and impact their profitability if their ability to avoid taxes is hurt. This could disrupt urban wholesale channel in near term. Dabur’s over indexation to rural India will also help it in this case as it is relatively under indexed to urban wholesale.
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Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 3
Rural growth could outpace urban growth We believe rural India could potentially grow faster than urban India especially if the predictions of normal monsoons play out. The 4QFY17 results commentary by Dabur and several other FMCG companies suggested that the recovery in rural India post demonetisation has been stronger and in some instances rural India is growing faster than urban India. Going forward, we believe this trend could accelerate as: 1) rural wage inflation is rising; 2) healthy growth in agri in 4QFY17 suggests farmer distress could be on the wane; and 3) a slew of government initiatives like DBT, Skill India, APMC reforms could aid rural growth.
Rural wage inflation has been strong
Historically there has been a healthy correlation between rural wage inflation and volume growth for the FMCG companies. Reason being, rural India has significantly lower penetration rates and usage rates vs urban India. Therefore, any rise in income goes towards more people using FMCG products or existing users using them more frequently. We observe rural wage inflation is on the rise and is currently running at a multi-year high. We expect this trend to be supportive of volume growth recovery in rural India and benefit Dabur.
Exhibit 3: High correlation between rural wage inflation and FMCG volume growth with a year’s lag
Source: Ambit Capital research
Exhibit 4: Rural wage inflation has been rising sharply and is at a multi-year high
Source: Ambit Capital research
Job creation focus is on the bottom end; white collar jobs under pressure
Latest naukri.com jobs index reflects that news flow around job stress in IT and the BFSI sector has started to play out and the impact on urban white collar job creation is visible. However, we believe programmes like Skill India and Make in India that promote manufacturing can potentially create a large pool of skilled blue collared workers and provide them with jobs. The beneficiaries are likely to be rural migrant workers.
Exhibit 5: Naukri.com jobs index is tapering with April showing an 11% dip
Source: Ambit Capital research
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Under Make in India programme, the Government plans to create 100mn jobs till 2022; Under Skill India, the Government plans to train 400mn people by 2022
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 4
DBT, APMC reforms imply more money in rural consumer’s pocket
The Government of India has taken several steps around improving rural India’s economic prosperity and ensuring their spending power goes up. These initiatives in our view should pull out millions of Indians from poverty into consuming class. Also, it should aid the existing consuming class to either use products more frequently or upgrade to higher-end products. This should lead to both volume growth as well as value growth through premiumisation. Some of these programmes are given below.
Exhibit 6: Some of the Government’s schemes that we believe are going to aid rural consumption Scheme Comments Progress Target
DBT Direct payout of subsidies cuts out middle man leading to more money in the hands of poor
Saving of `500bn in last 3 years; 84 schemes in 17 ministries are covered under the DBT
The savings figure is expected to significantly rise in the next financial year as the Government will be bringing a total of 533 central payout schemes in 64 ministries under the DBT mechanism by March 31, 2018
APMC reforms Higher payout to farmers for their produce by cutting out middle men
Under the new model law, traders will be able to transact in all markets within a state by paying a single fee and sell perishables such as fruits and vegetables outside existing mandis (wholesale markets)
This scheme is dedicated to bring in more than 50% of the farmers under its wing within the next 2–3 years
Crop Insurance Greater financial security to farmers preventing them from falling into debt trap if natural calamities occur
The scheme plans to cover 50% of the farmers in the next 2-3 years. As of now, insurance companies are being selected for implementation of this scheme
It envisages a uniform premium of only 2% to be paid by farmers for Kharif crops, and 1.5% for Rabi crops. The premium for annual commercial and horticultural crops will be 5%
Soil Health Cards Improve yields of the land and encourage right crops are grown to improve farmer’s income
As of March 2017, a little over 55mn cards have been issued, around 40% (of 140mn farmers)
The Union Budget for 2016-17 had allocated ~`3.7bn. In FY18, mini labs will be set up in all 648 Krishi Vigyan Kendras. And, to fund the setting up of 1,000 mini labs by qualified local entrepreneurs a credit-linked subsidy will be given
Swacch Bharat Mission
With increased sanitation, health remains better which cuts down spending on treatments
As of 27 October 2016, 56 districts in India were open defecation free (ODF)
Government is aiming to achieve an ODF India by 2 October 2019 by constructing 12 million toilets in rural India, at a projected cost of `1.96trn
Rural Electrification
Overall well-being is improved and entertainment options like TV and digital viewing improvement provides brands to create awareness through advertising
Government claims it has electrified 10,398 villages till 2016
Ensuring 24 hours of electricity to all of the country by the year 2019
Source: Ambit Capital research
Strong monsoons as predicted could provide a further fillip
The 4Q GDP print highlights strong growth in agriculture. The Indian Meteorological Department (IMD) and SkyMet both predicted a normal monsoon this year. Effect of El Nino does not appear to be strong enough yet to hurt the advance of monsoons. July is the most crucial monsoon month as that is when bulk of sowing happens. Even last year, when monsoons were good, we had witnessed a healthy growth in agri and company commentaries suggest that the month of October (festive season and harvest season) had witnessed double-digit volume growth before demonetisation pulled back the growth. We believe a strong monsoon leading to healthy growth in agri will revive volume growth to double digit with added support of low base taking it up even further.
Exhibit 7: Historical correlation between monsoon, agricultural growth and FMCG volume growth has been high
Source: Ambit Capital research
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Correlation of Monsoon with FMCG volume swing is high at 69%. Correlation of Agricultural growth and FMCG volume growth is a little lower at 56
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 5
OTC Pharma could improve Dabur’s earnings trajectory Dabur has been in the process of creating and launching a product portfolio in the OTC Pharma category for chronic ailments like diabetes, cardio vascular (CVS), weight management, arthritis and women’s health. We believe Dabur’s choice of ailments, product development, branding and route to market strategy should make these launches successful. As Dabur succeeds in scaling up this initiative, it could transform the trajectory of both the topline as well as profitability.
OTC Pharma – An idea whose time has come While Dabur has been working on this portfolio for more than 5 years, we believe this delay could actually be beneficial as the pick-up in acceptance for Ayurveda due to popularity of Patanjali could help.
Rising income levels, sedentary/urban lifestyles and rising health awareness will drive growth
With rising income levels and awareness towards healthier lifestyle going up, focus is now shifting towards managing and preventing ailments rather than curing them. Ayurvedic products have a perceived/actual edge in case of treating chronic diseases as they are perceived/actually have lower side effects vs allopathic medicines over longer term use. Also, with the Government focusing on alternative medicines through AYUSH (Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy), there is renewed legitimacy around non-allopathic medication. Popularity is also rising for Yoga and its proponents like Baba Ramdev who has led his FMCG company, Patanjali, to over `100bn within 5 years. We believe the environment is right for companies like Dabur to successfully launch new OTC Pharma products which are based on Ayruveda and are focused on such chronic ailments.
Exhibit 8: Government is encouraging non-allopathic medication through AYUSH initiatives To Enhance Required Steps Taken
Awareness Budget Ayush ministry has been allocated `14.3bn for the financial year
Credibility/ Efficacy
Trained practitioners
Setting up of new State Government Ayush Educational Institutions
Government recognition
UGC has asked universities to start PhD programmes under Ayush disciplines
Access Dispensaries/ Hospitals
Co-location of Ayush facilities at Primary Health Centres (PHCs), Community Health Centres (CHCs) and District Hospitals (DHs)
Upgradation of exclusive State Government Ayush Hospitals and Dispensaries
Pharmacies Strengthening of State Government/ PSU Pharmacies and Drug Testing Laboratories (DTL)
Drugs Cultivation and Promotion of Medicinal Plants
Source: Ambit Capital research; http://pib.nic.in/newsite/PrintRelease.aspx?relid=159638
Exhibit 9: Strong growth of Patanjali indicates rapidly rising acceptance of Ayurveda
Source: Ambit Capital research
Category sizes are large; fragmented market share not a concern
India is considered the world capital when it comes to chronic lifestyle ailments like Diabetes, CVS and Arthritis due to Vitamin D deficiency. Obesity levels are also on the rise. We believe the size of these categories is therefore large and given chronic nature of the diseases, users have to use the medication throughout their lives once they catch the ailment.
Size of the category is large: Currently, the size of Diabetes, CVS, Vitamins (for arthritis) and stress/anti-depression medication is `97bn, `136n, `96bn and `67bn respectively in India. These are growing at a CAGR of 10-20%. Even if we assume Ayurvedic medication reaches 10% of allopathic medicines (in China Traditional Chinese Medicines are 30% of total medicinal spends), the category size is large (`40bn+) and attractive for players like Dabur to enter.
Growth rates can be strong: Despite category sizes being already so large, it is estimated that only a fraction of patients are actually diagnosed and are under medication for these ailments. As affordability and access to medical services keep rising, more patients will get diagnosed and be brought under medication. Also, in urban India the age at which patients are catching these ailments is falling, which is leading to a faster growth in patient addition.
Exhibit 10: India is world’s capital for chronic lifestyle diseases
Disease Estimated market size (̀ mn)
Last 4-year growth CAGR
% of population affected
Anti-Diabetic 96,986 19% 5%
Cardiac 136,345 12% 2%
Vitamins / Minerals / Nutrients 95,707 10% 15%
Neuro / CNS 66,698 11% 1%
Source: Ambit Capital research
Globally, key issue that OTC Pharma categories face is fragmented market share. However, in India, Ayurvedic products tend to be market leaders in this space with healthy market shares. Lack of requirement for approvals, easier product development, distribution synergies with prescription drugs and high profitability despite branding costs make it attractive for all Pharma companies to have their own OTC portfolio. However, in case of Ayurvedic OTC products this is relatively a smaller issue given dearth of serious players with genuine right to win. Patanjali and Himalaya are the two established incumbents with Dabur and Emami making attempts to enter this space.
Exhibit 11: World OTC market is fragmented with no clear market leadership
Source: Ambit Capital research
Exhibit 12: Indian OTC has lower fragmentation and is dominated by Natural/Ayurvedic companies
Source: Ambit Capital research
Profitability and brand loyalty in functional, need-based categories are high
Besides providing large category size and high growth rates, these products also tend to have higher profitability. Being functional (providing tangible relief) and need-based (providing cure) in nature, these products tend to have healthy pricing power which allows gross margins to be high. Despite large part of this GM being invested back for brand building, the OPM tends to remain high (in the range of ~30%) which is significantly better than Home and Personal Care (HPC) category which tend to have profit margins of ~20%.
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Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 7
Exhibit 13: Average operating margin for global HPC companies is at ~20%
Source: Ambit Capital research
Exhibit 14: Average operating margin for global OTC Pharma divisions is ~28%
Source: Ambit Capital research
Dabur has ‘right to win’ in this segment We believe Dabur has the right to succeed in OTC Pharma due to its heritage, its brand’s association with herbal/natural products and right launch strategy, well-researched products with supportive clinical trial data, scoping of allopathic doctors and calibrated product/geographic spread.
Exhibit 15: Summary of Ayurveda players in India
Company Since Revenue (̀ bn)
Last 5-year revenue CAGR
Distribution reach (mn
stores)
Dabur 1884 77.5 8% 5.8
Emami 1974 25.3 12% 4.3
Patanjali 2006 105.6 88% 1.0
Himalaya 1930 ~25.0 ~20% 0.6
Source: Ambit Capital research
Exhibit 16: Players active in Ayurvedic OTC Pharma space
Dabur Patanjali Himalaya Emami Comments
Credibility
Patanjali enjoys higher credibility due to Baba Ramdev’s image
Branding
Due to more than 100 years of existence in Ayurvedic field, Dabur enjoys higher brand power with Patanjali being close second
Distribution
Dabur’s total reach of 5.8mn outlets scores higher than its peers
Doctor Connect
Dabur scores higher in Doctor advocacy versus its peers. Patanjali’s doctor outreach is limited to only Ayurvedic doctors and does not extend to allopathic doctors
Price Points
Patanjali products are ~20-30% cheaper than Dabur and Emami leading to low score for Dabur
Source: Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak
Branding and distribution strengths should help where others failed
Dabur by virtue of its 130 years of presence in India with undiluted positioning of being Ayurvedic/herbal/natural products-based company gives it the necessary credibility to enter OTC Pharma category. Also, unlike its peers like Himalaya which had an umbrella brand strategy that did not allow specific products to get identified with their functions/needs/therapies, Dabur plans to brand each product separately clearly brining out its association with a particular ailment. This would help popularise and scale up each product in its own right. Also, Dabur by virtue of a wider product portfolio has a distribution reach unmatched by any of its peers. It has also embarked on a mission to double its pharmacies’ reach through ‘Project Core’. This has enabled it to establish direct reach with over 212,000 pharmacies (out of 850,000 nationally). This should provide it an edge over its peers.
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Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 8
Exhibit 17: Dabur’s distribution reach is superior to peers
Source: Ambit Capital research
Dabur has been building the product portfolio over the past 5 years
Given the cost of failure is high and each failed launch can set back re-launch attempts by many years, Dabur has been meticulous in its launch process for OTC Pharma category. It has spent more than 5 years in developing product formulations in-house (with exception for Diabetes product Madhurakshak which has been in-licenced), getting them patented and collecting their efficacy data through clinical trials. The products it has created and has been testing during this period are discussed below.
The best ‘route to market’ strategy among peers
We believe Dabur can succeed where Himalaya and Emami have failed to make an impact. In case of Himalaya, we believe lack of scoping of allopathic doctors and an umbrella branding strategy which did not allow its products to be associated with particular functions/needs/ailments has hurt its potential to scale up. In case of Emami, we believe launch of a wide array of products without requisite allopathic doctor support and weak direct distribution in launch markets in South India led to less than desirable success rate. Dabur on the other hand has been careful in launching and scaling up few products to begin with. It has been careful in limiting the geographies to only two states (Maharashtra and UP) and has put in the efforts and investments to scope over 10,000 allopathic doctors in these two states using clinical trial data. This has resulted in Dabur learning from any potential mistakes and getting the confidence for a successful national launch for some of its products. As compared to Patanjali, Dabur probably lacks branding capability but benefits from wider distribution and more mainstream acceptability of its products as it appeals to allopathic medication patients as well, whereas in case of Patanjali patients with exclusive faith on Ayurveda form a larger base.
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Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 9
Exhibit 18: List of products launched for cholesterol management, stress management and diabetes
Source: Ambit Capital research
A case of counting chickens before they are hatched? We realise that while the case for Dabur’s entry into OTC Pharma category and its potential to transform Dabur’s earnings trajectory is high, there are certain risks associated with the launch which could make it less impactful vs our expectations.
Launches have been in the pipeline for long and have been delayed: While we appreciate that Dabur has chosen a robust new launch process to ensure haste does not lead to failure, we do feel the launch cycle has taken much longer than initially anticipated. Even going forward the process that is likely to be followed will be a long drawn affair with selective products being launched across selective geographically over a period of time. This could mean despite success, contribution of these launches could be small to overall topline growth and profitability of the company.
Immediate benefits and efficacy are not visible to consumers: Dabur’s existing Health Supplements and Digestives portfolio has products like Pudin Hara, Hajmola and Honitus which provide tangible, visible and fairly immediate relief to consumers. Such products tend to grow faster and enjoy better brand loyalty which gives them higher pricing power/profitability as their efficacy is well recognised by the consumer. However, the OTC Pharma range being launched is for long-term consumption for treating chronic diseases and their benefit to the consumer is unlikely to be visible in the near term. This could delay the adoption rate and could also lead to high dropout rate for these products with the consumers.
Profitability implications are yet unknown: We believe GM for these products would be in the range of 70-80% vs Dabur’s overall GM of ~50%. However, these could run at sub-optimal scale and require high investments on branding, distribution and doctor scoping for a prolonged period of time. This could limit their positive contribution towards lifting up Dabur’s overall margin trajectory and could initially be a drag on Dabur’s profitability.
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 10
F&B, International set for a turnaround The two key businesses that have been under pressure are F&B (12% of consolidated sales) and International (32% of sales). In case of fruit juices, disruption in supply chain in Nepal and subsequent setting up of alternate facilities in India and Sri Lanka were the key reasons for decline in EBIT margin (down from 16.1% to 13.8% over FY16-17). In the International business, problems have been two-pronged: 1) sharp decline in MENA due to geopolitical issues and economic slowdown due to crude decline; and 2) inorganically acquired businesses of Hobi and Namaste performing below expectations. We believe both these business units will turn around with a rise in profitability in juices and revival of growth in International.
Dabur on top of our international strategy framework As per our detailed analysis of the international businesses of Indian FMCG companies (19 April 2017) on parameters like geographical split, product/brand portfolio, route to market, and organic vs inorganic strategy, Dabur scores the highest. We believe higher contribution from South Asia and MENA, a large organically developed product/brand portfolio, strong local branding and supply chain, and a slowdown in M&A activity are key positives for Dabur.
Exhibit 19: Dabur’s international business scores highest in Indian FMCG
Geographical mix with focus on S Asia and MENA is favourable
Dabur derives 33% of its international sales from MENA region, which has grown at 15% CAGR over FY11-17. Also, it derives 28% of international sales from South Asia, which has also grown strongly at 26% CAGR over FY11-16. We believe this is a healthy geographical mix as we prefer these two markets over the rest of the world for Indian FMCG companies to expand. This is because they have the ‘right to win’ in these markets. Large Indian diaspora, cultural similarity with local population, strong growth potential and largely stable FX regimes are the key positives. This compares favorably with Western countries where FX and geopolitical risks are lower but so is growth potential and acceptability of Indian FMCG products. In Africa, growth potential is higher but the negatives are geopolitical and FX risks. South-east Asia has lower geopolitical and FX risks with moderate growth potential but lower acceptability for Indian FMCG products.
Exhibit 20: MENA and S Asia are better geographies for Indian FMCG players vs the rest of the world
Product and brand
acceptability
Ease of doing business
Growth potential
Geopolitical risk Overall Comments
Africa/LatAm
While there is growth opportunity, there are equally high geopolitical and forex or repatriation risks. The ease of doing business is particularly poor in Sub-Saharan Africa.
Middle East
There is high product and brand acceptability due to the Indian diaspora and high ease of doing business; however, the geopolitical risks are a concern.
South-East Asia
There is very low acceptability of Indian products and brands; ease of doing business and low geopolitical risks make this a favourable geography to enter.
Indian Subcontinent (ex-India)
Very high cultural similarities to India and growth potential make this one of the most conducive geographies to grow
Developed Market
There is high competitive intensity from well-entrenched brands and low-growth potential in these markets.
Moderation in acquisitions post learning from prior deals is a positive
Dabur has made two major acquisitions internationally – Hobi (2010) in Turkey and Namaste (2010) in the US for catering to Africa. Hobi was acquired for high growth potential in Turkey and access to product portfolio which could be cross-pollinated into Dabur’s other international markets. Namaste was acquired as it was catering to the African American community in the US and was expected to find wide acceptability in Africa at the right price point. However, both acquisitions have underperformed expectations as explained below:
Hobi: Business has grown at 16% CAGR in INR terms over FY12-16. However, high cost inflation and transactional impact of FX depreciation kept profitability low. Also, in recent years, rising social unrest and geopolitical instability due to war in the neighboring areas caused a slowdown in the economy, resulting in weaker revenue growth.
Namaste: The key growth driver for Namaste was expected to come from African markets. Dabur had planned to set up local manufacturing and supply chain in Africa to bring down costs and make Namaste products affordable. Acceptability of products was not an issue due to popularity among the African American community in the US. However, Dabur struggled to acquire land and get timely approvals to set up local operations. The erstwhile management of Namaste also left before time, leading to disruption. Namaste has not grown over FY12-16.
Exhibit 21: Financial snapshot of Dabur’s international subsidiaries ̀ mn FY12 FY13 FY14 FY15 FY16 CAGR
EBITDA 834 376 183 11 106 Margin 15.2% 7.7% 3.1% 0.2% 1.9% Source: Ambit Capital research
We appreciate the fact that Dabur has learnt from its experiences and has gone slow in acquiring businesses internationally. Also, the way these businesses are structured is that their debt servicing is to be done by these businesses themselves with no liability or obligation on Dabur India or any other Dabur business unit to service this debt. This is a prudent capital allocation strategy, in our view.
We see a turnaround soon
Dabur’s international business revenue declined by 5% in FY16-17 vs the last 5 years’ CAGR of 25%. Key reasons for this are: 1) significant slowdown in MENA due to geopolitical and economic weakness; 2) FX depreciation in Africa and Turkey; and 3) the underperformance of Namaste. With MENA likely to revive from a low base and Namaste shifting manufacturing to Africa, we expect overall growth in the International business to hit 13% CAGR over FY17-20E vs 10% over FY12-16.
MENA remains core to international business: We believe with crude prices stabilizing and market size having corrected significantly (down 30% over FY16-17), MENA should see a revival in growth on a low base. Dabur remains focused on the geography with continued investment in local product development, manufacturing, branding and distribution with Vatika and Dermoviva as the key brands.
Namaste should see revival in growth as Africa facilities ramp up: In the case of Namaste, Dabur has been able to set up and operationalize production facilities in Africa. This should allow it to finally launch the Namaste portfolio in African markets in a meaningful manner and realize higher growth rates (10%+) hereon. Over the last year, Dabur has acquired four small cosmetics and personal care firms in South Africa (Discaria Trading, CTL Group, D&A Cosmetics, Atlanta Body & Health) for a total consideration of `350mn. They should provide route to market and manufacturing footprint for Namaste.
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 12
FX risks remain high but spillover effect is ring-fenced: FX risks in Africa and Turkey remain high and Dabur will continue to face translational impact on its earnings from these geographies. However, Dabur has carefully structured its International and Domestic businesses in such a manner that investments and debt servicing are a legal responsibility of the local subsidiaries and Dabur overall does not get impacted if FX declines.
Exhibit 22: Growth trajectory of the international business set to revive
Source: Ambit Capital research
Juices will lead the F&B thrust Beside OTC Pharma, the other key category of focus for Dabur is F&B, with juices being the key driver within the overall category. Dabur has planned a series of new launches (some of which like tender coconut water are already ramping up fast) including entering the much larger fruit drinks category through a brand called ‘Juicy’. Also, as supplies for juices from facilities in India and Sri Lanka ramp up, these should achieve optimal scale and aid a revival in profitability to erstwhile mid-teen levels.
We prefer F&B categories over HPC
We are encouraged by Dabur focusing on F&B category as believe F&B should grow significantly faster than Home and Personal Care (HPC) categories. This will be led by low penetration rates, large share of unorganized segment and changing consumer behavior that prefers convenience, impulse purchases and health benefits. Dabur has done well in a tough category like fruit drinks, where it has managed to grow market share and retain #1 position despite the presence of strong international and local competitors like Pepsi (Tropicana) and ITC (B Natural).
Exhibit 23: Dabur has maintained a healthy market share in Fruit Drinks
Source: Ambit Capital research
-10%
0%
10%
20%
30%
-
10,000
20,000
30,000
40,000
FY12
FY13
FY14
FY15
FY16
FY17
FY18
E
FY19
E
FY20
E
International business revenue (Rs mn) Growth (RHS)
24% 23% 22% 22% 23% 22%
23% 24% 24% 26% 27% 24%
13% 14% 15% 16% 15% 14%
40% 39% 40% 36% 36% 40%
0%
20%
40%
60%
80%
100%
2010 2011 2012 2013 2014 2015
Coca Cola Pepsi Dabur Others
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 13
Profitability should return to prior levels
The ramp-up in the profitability in fruit juices was hit by disruption in the supply chain in Nepal due to social and political unrest. It is to Dabur’s credit that in a short period of time it was able to set up alternate sourcing from India and Sri Lanka. However, sub-optimal scale of operations at these facilities hurt the profitability of the segment. As volumes of juices continue to grow and stability returns to Nepal, we expect these facilities to post a rise in profitability.
Exhibit 24: Steady recovery in profit margins for Dabur in fruit Juices
Source: Ambit Capital research
New launches across the spectrum should sustain strong topline growth
We expect fruit juices and drinks to be the key drivers of growth revival led by new launches. Dabur has already successfully launched a tender coconut water product. It also continues to expand and refresh its offerings under its umbrella brand, Real. Plans are also in place to enter the much larger fruit drinks segment through a brand called ‘Juicy’. In our view, this is an attractive segment due to 3x the size and potentially higher profitability given much lower fruit and pulp content. Also, volatility in margins is likely to be lower in the case of fruit drinks than fruit juices which are often hurt by swing in fruit pulp prices and limited scope for alteration in formulations given the need to preserve purity of content.
Exhibit 25: Fruit Juices are growing faster than Fruit drinks but on a lower base (Juices are 1/3rd of drinks)
Source: Ambit Capital research
Exhibit 26: Dabur’s value market share in Juices has increased over 2012 to 2016 despite competition from ITC
Source: Ambit Capital research
12.0%
14.0%
16.0%
18.0%
20.0%
-
5,000
10,000
15,000
20,000
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Juices and Food revenue (Rs mn) EBIT margin (RHS)
20%
22%
24%
26%
Juice Drinks 100% Juices
Volume growth CAGR over 2010-15
52% 57%
38% 28%
10%8%7%
0%
20%
40%
60%
80%
100%
2012 2016
Dabur Real Pepsico TropicanaOthers ITC - B-Natural
Fruit Juices are defined as Juices with more than 24% fruit/pulp content whereas Fruit drinks are pre-dominantly sugar and flavor based drinks with less than 24% juice content. Dabur has been present in Fruit Juices which is a smaller, faster growing category and carries strong health related positioning.
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 14
Earnings to rebound strongly We expect a healthy rebound in Dabur’s earnings growth trajectory led by strong topline growth with flat-lining of margins. We expect near-term disruptions from demonetisation and GST to subside by 2HFY18. Also, new product launches are expected to pick up and the international segment is expected to revive. Profitability should be maintained as higher investments in A&P are likely to be funded by increased profitability from juices and potential benefits from GST rates. We are building in an EPS CAGR of 18% over FY17-20E vs 15% over FY12-17.
Low base and new launches to drive sales We expect sales growth to pick up from the low levels of FY17 (2% YoY decline) to a healthy 16% CAGR over FY17-20E as near-term headwinds of demonetisation and GST give way to structural growth drivers of new product launches and recovery in rural consumer demand.
Strong topline growth from 2HFY18
We are building in over 20% topline growth in 2HFY18 given the potential confluence of these factors: 1) re-stocking as GST-related disruptions settle; 2) low base as last year was impacted by demonetisation; 3) revival in new product launches; and 4) strong rural demand from continued rural wage inflation and possibly good monsoons. We expect this sales momentum to carry forward into FY19-20 as well, especially as the International business revives too. We are building an overall sales CAGR of 16% for FY17-20.
Exhibit 27: Sales trajectory for Dabur is expected to pick up from 2HFY18
Source: Ambit Capital research
New launches could again contribute over 30% to growth
Traditionally, new product launches (variants/brands/products/SKUs launched over the last 3 years) have contributed almost a third of growth for Dabur. However, over the last 2-3 years, this pace has slowed as new launches slowed due to delay in launch of the OTC Pharma portfolio and the Uveda range of premium skin care. With OTC Pharma now on the verge of launch and expectations of a healthy new product pipeline in F&B and skin care, we expect new launches to again contribute at least a third of growth for Dabur.
-20%
-10%
0%
10%
20%
60,000
80,000
100,000
120,000
140,000
FY14
FY15
FY16
FY17
FY18
E
FY19
E
FY20
E
Revenue (Rs mn) Growth (RHS)
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 15
Exhibit 28: New product launches had slowed for Dabur in recent years
Time Segment Product
FY12 Juices Real Burrst: Ethnic Flavour – Kokam
Skin Care Gulabari: Moisturizing Lotion
Juices Activ: Drinking Yoghurt
Skin Care Fem: Turmeric Variant
Home care Odonil Gels
FY13 OTC & Ethicals Ratnaprash
Hair Care Vatika Enriched Coconut Hair Oil with Hibiscus
International business should revive sooner than later
International business contributes 32% to Dabur’s sales. We expect the growth rate to revive to 13% over FY17-20E from 8% over FY12-17. Bulk of this growth should be led by a revival in MENA (33% of international business) and acceleration in growth in Africa led by Namaste (21% of international sales).
Exhibit 29: MENA and Africa contribute 33% and 22% to International business revenue
Source: Ambit Capital research
Exhibit 30: Hobi and Namaste contribute 9% and 21% to Dabur’s International business revenue
Source: Ambit Capital research
Africa, 22%
Middle East, 33%
America, 17%
Asia, 28%
Dabur
Hobi, 9%
Namaste, 21%
Others, 70%
Contribution to International business
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 16
Margin boost potential from F&B turnaround We expect Dabur to largely maintain its profit margins as any gains from GST or revival in margins of F&B are likely to be reinvested in A&P for supporting new launches. However, as the OTC Pharma portfolio scales up, we expect a structural improvement in the margin trajectory in the longer run. For FY17-20E, we build in a moderate 110bps margin gain.
Exhibit 31: GM trajectory likely to be better than the OPM trajectory
Source: Ambit Capital research; Since FY17 gross margin and EBITDA margin are on Ind AS, hence historical numbers are not comparable
Profitability in juices should revive as new facilities scale up
F&B contributes 12% of sales and ~13% of profits for Dabur. A healthy recovery in margins for fruit juices could be a key driver for overall profitability improvement.
GST is a black box – could surprise on the upside
While GST is expected to be beneficial for Dabur overall, the actual impact is not yet known as the extent of Input Cost Credits is not yet known. Also, with Dabur’s new Guwahati facility coming on stream, there should be benefit on the taxation front as Dabur should be able to get refund for its State GST component. Though any large benefit (as in case of oral care) is expected to be passed on to consumers, we believe Dabur should still benefit from either margin gains if some tax benefits are retained or higher volume growth if it is able to take meaningful price cuts.
Exhibit 32: Dabur should be a net beneficiary of GST rates
Category % of Sales Old Tax Rate New Tax Rate
Health Supplements 18% 11% 12%
Digestives 6% 11% 12%
OTC & Ethicals 9% 11% 12%
Home Care 6% 22-23% 28%
Hair Care 23% 22-23% 23%
Skin Care 5% 22-23% 28%
Oral Care 15% 22-23% 14%
Foods/ Juices 12% 12% 12%
Others 6% 22-23% 18-28%
Total 18% 17%
Source: Ambit Capital research
Higher A&P spends around new launches are a key risk
We expect the recent cut in A&P spends to be short-lived as Dabur embarks on a more aggressive new launch cycle. We expect A&P spends as a percentage of sales to pick up by 60bps over FY17-20E. But this could be funded by a rise in GM and operating leverage in other expenses like employee costs, overhead expenses and logistic costs.
15%
17%
19%
21%
45%
48%
51%
54%
57%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
E
FY19
E
FY20
E
Gross margin EBITDA margin (RHS)
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 17
Exhibit 33: A&P spend could rise…
Source: Ambit Capital research; FY17 onwards numbers are based on Ind AS and hence prior numbers are not comparable
Exhibit 34: …but other expenses should make up for it
Source: Ambit Capital research; FY17 onwards numbers are based on Ind AS and hence prior numbers are not comparable
Summary of financial estimates Exhibit 35: Key assumptions and estimates (` mn)
FY16 FY17 FY18E FY19E FY20E Comments
Profit and loss Domestic revenues 55,283 54,812 63,579 75,349 89,253 Expect domestic revenue growth of 18% CAGR over
FY17-20E led by fruit juices, Oral care and OTC Growth (%) 0.2% -0.9% 16.0% 18.5% 18.5%
International revenues 23,224 21,989 24,716 27,335 31,749 Expect strong revenue growth of 16% and 15% CAGR in Asia and the Middle East over FY17-20E on recovery from a low base Growth (%) 1.4% -5.3% 12.4% 10.6% 16.1%
Gross Profit 46,570 38,582 44,882 52,601 62,459 Expect marginal increase in gross margins as F&B margins recover and on increased contribution from of higher margin OTC business Gross margin (%) 55.1% 50.1% 50.7% 51.1% 51.5%
Employee cost (% of sale) 9.4% 10.3% 10.2% 10.1% 10.0% Expect operational efficiencies to lead to minor benefits in employee costs
Advertising (% of sale) 14.7% 8.4% 8.6% 8.9% 9.0% Increasing new product launch activity to lead to higher advertisement spends
Freight & forwarding (% of sale) 2.1% 2.1% 2.1% 2.1% 2.1% Expect freight expenses to remain stable
Other expenses (% of sale) 10.9% 9.8% 9.8% 9.7% 9.7% Expect other expenses to remain stable
EBITDA 15,198 15,089 17,704 20,895 25,103 Above changes should lead to margins improvement in EBITDA margins over FY17-20E EBITDA Margin 18.0% 19.6% 20.0% 20.3% 20.7%
Tax rate 19.4% 20.5% 22.0% 23.0% 23.0% Tax rates to increase marginally over FY17-20
Net Profit margin 14.8% 16.6% 16.5% 16.6% 17.1% Lower interest costs and slower increase in depreciation to help boost net profit margin
Balance Sheet Capex 2,393 2,934 2,000 2,000 2,000
No material capex requirements for FY17-20 Capital Work in Progress 448 421 421 421 421
Working Capital days 13 12 11 11 11 Marginal improvement in working capital cycle due to inventory and creditor management
Debtor days 35 35 35 35 35 Expect Debtors days to remain stable
Current Liabilities days 73 71 71 71 71 Expect current liabilities days to remain stable
Inventory days 47 47 47 47 47 Expect Inventory days to remain stable
Net debt/(cash) to equity (0.5) (0.6) (0.6) (0.7) (0.7) Dabur is now a net cash business
20E Free cash flows 10,439 11,366 15,400 16,558 20,230
Source: Ambit Capital research
5%
8%
11%
14%
17%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
E
FY19
E
FY20
E
A&P as % of sales
0%
2%
4%
6%
8%
10%
12%
FY12
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FY15
FY16
FY17
FY18
E
FY19
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FY20
E
Employee Cost Freight Overheads
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 18
Weak YTD performance = value comfort Dabur’s share price has underperformed Sensex/FMCG sector by 15%/23% YTD 2017. We believe this was justified given the impact of demonetisation and potential disruption due to GST on Dabur is higher than peers. This is due to Dabur’s: 1) higher rural exposure; 2) weaker market share, which would make the capital-constrained wholesale channel prefer higher other brands with higher market shares; and 3) stalling of new product launches, which were a bigger driver of growth for Dabur than peers. We expect Dabur to witness a re-rating and close its steep valuation gap of 20% vs the sector as earnings rebound from 2HFY18. Our DCF-based TP of `330 (17% upside) implies a 33x FY19E P/E, marginally below the sector’s current valuation of 35x FY19E P/E.
Relative underperformance has provided valuation comfort
We believe Dabur’s underperformance now prices in near-term hit to earnings and has created valuation comfort. Historically, Dabur’s one-year forward P/E has been at ~10% discount to the FMCG sector P/E. Due to Dabur’s share price underperformance since 2017, it is trading at ~20% discount to FMCG sector P/E.
Exhibit 36: Dabur has underperformed Sensex and FMCG index
Source: Ambit Capital research
Exhibit 37: Dabur is currently trading at ~20% discount to FMCG sector
Source: Ambit Capital research
We believe the FMCG sector’s current valuation at ~35xFY19E P/E looks expensive and builds in mid-teen growth over the next ~20 years. Given penetration rates for most Home and Personal Care categories are now reaching saturation levels, for such high growth rates to sustain a company must be active in any of the following: 1) seeding new age, discretionary categories like cosmetics, perfumes, conditioners etc.; 2) leading premiumisation through higher-end variants like liquids and gels (shower, dish wash, detergents) or brands; 3) focus on health and wellness which provide long and strong growth ramp with high profitability; or 4) be involved in F&B categories which have low penetration rates and huge share gain potential from unorganised segments.
9095
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Dabur Sensex BSE FMCG
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Dabur 1yr Fwd PE Prem/ Disc to Sector
5 Year average
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 19
Exhibit 38: F&B is placed higher in our pecking order in the FMCG space
Source: Ambit Capital research, Size of the bubble denotes valuations
In the case of Dabur, we believe it is set to ride Health & Wellness and F&B planks along with some degree of participation in seeding new age categories as well. Hence, we believe Dabur’s current discount to FMCG sector is unjustified. (i) Superior sales/EPS CAGR of 16%/18% over FY17-20E (vs 15%/17% for the sector) in the near term and (ii) potential for earnings upgrade and re-rating if OTC Ayurveda portfolio launch is more successful than anticipated in the longer run provide valuation support.
We turn BUYers with DCF-based TP of `330 Given the cash-generative nature of the business, we use a three-stage DCF-based model to arrive at a fair value for Dabur. The assumptions for the weighted average cost of capital and terminal growth rates are shown in the exhibit on the right margin. We have assumed longer-term debt:equity ratio of zero given its strong cash position and free cash flow generation. Hence, the company has enough surplus cash available on its balance sheet for future capex. Stage 1 (FY17-20): Over FY17-20, we expect revenue CAGR of 16% due to new product launches and revival of macro demand. We expect a 130bps increase in EBIT margin over FY17-20 from 17.7% to 19.0% in FY20. This will result in PAT growth of 18% CAGR and increase in RoE from 28% to 30% over FY17-20. Stage 2 (FY21-35): Over FY21-35, we assume that revenue growth will moderate from 16% in FY21 to 10% in FY35. We assume a gradual increase in EBIT margin from 22% in FY22 to 30% in FY30 (including other income) due to higher contribution from high-margin OTC & Ethical business and improving profitability of F&B and International businesses. Beyond FY30, EBIT margin will remain stable at 30% until FY45. We assume sales/EBIT CAGR of 14%/15% over FY21-35.
HPC
F&B
AlcoBev
Paints
Tobacco
HPC Fut
F&B Fut
AlcoBev Fut Paints Fut
Tobacco Fut
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1
2
3
4
5
6
- 1 2 3 4 5 6
RO
CE
Growth
WACC assumptions
Item Value
Risk-free rate (%) 8.5
Beta (2-year monthly) 0.50
Equity risk premium (%) 9.0
Cost of equity (%) 13.0
Cost of debt (%) 12.0
Debt/Equity ratio (%) 0%
Tax rate (%) 23.0
WACC (%) 13.0
Terminal growth rate (%) 5.0
Source: Ambit Capital research
Low Medium High
Low
M
ediu
m
Hig
h
Dabur
June 13, 2017 Ambit Capital Pvt. Ltd. Page 20
Stage 3 (FY35 onwards): Beyond FY35, we factor in terminal growth of 5% assuming ~3% inflation and ~2% population-led volume growth.
Based on these forecasts, we estimate a DCF-based valuation of `330 (upside of 16%), implying FY19E P/E multiple of 33x. The cash flow and return profiles generated by our model are shown in the exhibits below.
Key driver of target price change – structural increase in earnings trajectory
There are two key drivers for our change in TP:
Near-term earnings upgrade of 2-4% for FY18-20E led by our expectation of a faster than expected pace of new product launches and sustained margin gains due to turnaround in fruit juice business despite higher A&P on new launches.
Structurally higher margin trajectory over the fade period as we expect OTC Ayurveda portfolio to be margin-accretive for Dabur in the longer run.
Catalysts Revival in sales in 2HFY18: Dabur would witness volume-led growth from
2HFY18 due to improvement in rural demand led by good monsoon and aggressive new product launches.
New launch pipeline to accelerate: We expect Dabur to resume aggressive launch of new products, especially in OTC Ayurveda. This should boost sales growth from 2HFY18.
Margin gain in F&B: We expect Dabur to gain margins starting FY18 led by turnaround in juices profitability as scale efficiencies from newly set up sourcing facilities in India and Sri Lanka kick in.
Risks Higher-than-expected impact on demand in rural areas: Prolonged impact
of weak consumer sentiment and supply chain disruption (from stalling of wholesale channel) in rural areas due to GST could impact recovery in demand. This could pose risks to our sales growth estimates in FY18.
Aggressive expansion by peers: Aggressive expansion by ITC in the fruit juices category and by Patanjali in OTC and oral care could impact growth of Dabur.
Delay in new product launches: Delay in new product launches in OTC and Ethical can impact sales growth.
Weakness in International business to continue: Prolonged impact of macro-economic headwinds in MENA and higher-than-expected currency depreciation impact in Africa could impact earnings of Dabur’s International business.
Ambit vs consensus Exhibit 46: Our FY18/19 estimates vs consensus (` mn)
Ambit Consensus Divergence from consensus Comments
FY18E
Net Sales (` mn) 88,530 86,943 2% Expect marginal higher sales than consensus mainly due to our higher growth in OTC and turnaround in international business
EBITDA (` mn) 17,704 16,596 7% Combination of higher sales and higher profitability compared to consensus leads to higher EBITDA as we expect better category mix (OTC Ethicals) and turnaround in Juices to offset new launch related costs
EPS (`/share) 8.3 8.1 2% EPS growth is lower than EBITDA growth due to higher depreciation from commissioning of Guwahati plant and higher tax rate than consensus
FY19E
Net Sales (` mn) 102,942 97,236 6% Expect marginal higher sales than consensus mainly due to higher growth in OTC and ethical
EBITDA (` mn) 20,895 18,857 11% FY19’s divergence builds upon FY18’s outperformance as we expect similar drivers to continue
EPS (`/share) 9.7 9.3 5% We expect Dabur to continue building upon FY18’s earnings growth drivers of margin-accretive new launches and turnaround in Juices and international businesses.
Source: Bloomberg, Ambit Capital research
Explanation of our forensic accounting scores Exhibit 47: Explanation of our forensic accounting scores
Segment Score Comments
Accounting GREEN In the past, Dabur has reported strong cash conversion and working capital management, and low levels of loans and advances and contingent liabilities. So we give a high rating to its accounting quality. Dabur remains in top Decile of D1 over 2012-16 and ranks highest in the FMCG sector.
Predictability AMBER The predictability of Dabur’s profit has been stable in the last 6 quarters due to stable input cost. However, revenue predictability has been weak due to demonetisation.
Earnings momentum RED Dabur’s estimates have been trimmed by Consensus for FY17 and FY18 due to the impact of demonetisation.
Source: Ambit Capital research
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June 13, 2017 Ambit Capital Pvt. Ltd. Page 23
Exhibit 48: Forensic score analysis
Source: Ambit ‘HAWK’, Ambit Capital research
Exhibit 49: Greatness score analysis
Source: Ambit ‘HAWK’, Ambit Capital research
Exhibit 50: Dabur’s forensic score evolution has been in top decile over 2012-16
Source: Ambit ‘HAWK’, Ambit Capital research, Note: Using our ‘accounting framework’, we categorise the market into deciles on the basis of their accounting quality with ‘D1’ indicating the best decile and ‘D10’ indicating the worst decile. Our analysis points towards a strong link between accounting quality and share price performance.
Exhibit 51: Dabur’s greatness score evolution has improved over 2015-16
Source: Ambit ‘HAWK’, Ambit Capital research, Note: On our ‘greatness framework’, on a scale of 0 to 100, a small minority of outstanding companies tend to score above 67 whilst most companies tend to have scores below 50
Net profit margin (%) 13.6% 14.8% 16.6% 16.5% 16.6%
Dividend payout ratio (%) 39.0% 38.0% 54.0% 50.8% 52.1%
Net debt: equity (x) 0.2 0.2 0.2 0.1 0.1
Working capital turnover (x) 53.0 27.2 20.5 32.2 32.2
Gross block turnover (x) 4.1 3.9 3.1 3.3 3.6
RoCE (%) 28.9% 28.0% 24.0% 24.2% 25.8%
RoE (%) 35.5% 33.3% 28.4% 28.0% 28.6%
Source: Company, Ambit Capital research
Valuation Parameter
Year to March FY15 FY16 FY17 FY18E FY19E
EPS (`) 6.1 7.1 7.3 8.3 9.7
Diluted EPS (`) 6.1 7.1 7.3 8.3 9.7
Book value per share (`) 19.2 23.9 27.8 31.9 36.6
Dividend per share (`) 2.0 2.3 3.3 3.5 4.2
P/E (x) 46.9 39.9 39.1 34.2 29.2
P/BV (x) 14.8 11.9 10.2 8.9 7.8
EV/EBITDA (x) 38.2 33.2 33.6 28.2 23.5
Price/Sales (x) 6.4 5.9 6.5 5.7 4.9
Source: Company, Ambit Capital research
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June 13, 2017 Ambit Capital Pvt. Ltd. Page 26
Institutional Equities Team Saurabh Mukherjea, CFA CEO, Ambit Capital Private Limited (022) 30433174 [email protected] Pramod Gubbi, CFA Head of Equities (022) 30433124 [email protected]
Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin - Head of Research E&C / Infra / Cement / Home Building (022) 30433241 [email protected] Aadesh Mehta, CFA Banking / Financial Services (022) 30433239 [email protected] Abhishek Ranganathan, CFA Retail / Consumer Discretionary (022) 30433085 [email protected] Anuj Bansal Consumer (022) 30433122 [email protected] Aditi Singh Economy / Strategy (022) 30433284 [email protected] Ashvin Shetty, CFA Automobiles / Auto Ancillaries (022) 30433285 [email protected] Bhargav Buddhadev Power Utilities / Capital Goods (022) 30433252 [email protected] Deepesh Agarwal, CFA Power Utilities / Capital Goods (022) 30433275 [email protected] Dhiraj Mistry, CFA Consumer (022) 30433264 [email protected] Gaurav Khandelwal, CFA Automobiles / Auto Ancillaries (022) 30433132 [email protected] Girisha Saraf Home Building (022) 30433211 [email protected] Karan Khanna, CFA Strategy (022) 30433251 [email protected] Mayank Porwal Retail / Consumer Discretionary (022) 30433214 [email protected] Pankaj Agarwal, CFA Banking / Financial Services (022) 30433206 [email protected] Paresh Dave, CFA Healthcare (022) 30433212 [email protected] Parita Ashar, CFA Cement / Metals / Aviation (022) 30433223 [email protected] Prashant Mittal, CFA Strategy / Derivatives (022) 30433218 [email protected] Rahil Shah Banking / Financial Services (022) 30433217 [email protected] Ravi Singh Banking / Financial Services (022) 30433181 [email protected] Ritesh Gupta, CFA Oil & Gas / Chemicals / Agri Inputs (022) 30433242 [email protected] Ritika Mankar Mukherjee, CFA Economy / Strategy (022) 30433175 [email protected] Sagar Rastogi Technology (022) 30433291 [email protected] Sudheer Guntupalli Technology (022) 30433203 [email protected] Sumit Shekhar Economy / Strategy (022) 30433229 [email protected] Utsav Mehta, CFA E&C / Infrastructure (022) 30433209 [email protected] Vivekanand Subbaraman, CFA Media / Telecom (022) 30433261 [email protected]
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation
UNDER REVIEW We will revisit our recommendation, valuation and estimates on the stock following recent events
NOT RATED We do not have any forward looking estimates, valuation or recommendation for the stock POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
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June 13, 2017 Ambit Capital Pvt. Ltd. Page 29
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