Dabur India - Re-rating in the price - Antique

A strong contender for rural consumption

Dabur is a strong contender for the growth potential in the rural markets given its strong rural distribution in place and a rural heavy product portfolio. Dabur's hair oils, oral care and home care portfolio are strong fits in the rural market. Further the company's health supplements portfolio can benefit from the rising awareness for nourishment in the rural markets.

To witness revival during FY13 led by higher ad-spends

We believe that Dabur India will be back in the reckoning from FY13 with revival in IBD sales (ex-HOBI and Namaste) and acceleration in domestic volumes. In the short term, Dabur's domestic volumes would be aided by higher ad-spends. For a niche player like Dabur, ad-spends play a key role in driving growth.

Namaste to witness accelerated growth in the next 2-3 years

We expect acceleration in Namaste's growth with increasing exposure to Africa from the current 27% over the next 2- 3 years. Profitability of HOBI currently is impacted by depreciation of Lira versus USD and would witness recovery led by cost cutting initiatives of the company.

Rural distribution restructuring could lead the recovery in shampoos

The re-structuring of the rural distribution would lead the revival in volumes over the next 2-3 years. Dabur's renewed focus on rural markets could be a game changer for this category and aid volume growth going ahead.

Competition in hair oils and oral care is a concern

Two key categories for Dabur, hair oils and oral care are witnessing heightened competition from players like Marico and Colgate Palmolive respectively. Marico has been consistently gaining market share primarily in the Amla segment (relating to Dabur) while in the oral care category, Colgate Palmolive has competing through its economy brand and low units packs. This has led to relatively moderate for Dabur in these two categories.

Valuation

At the CMP of INR135, the stock is trading at a PE of 31.5x FY13e and 25.1x FY14e. The previous re-rating of the stock was led by the acquisition of Balsara and its turnaround. In view of the resilience witnessed in FMCG demand, Dabur's valuations have witnessed a re-rating. We believe that in the current environment, Dabur's valuations would be sustainable. Therefore we upgrade our target price to INR129 (implying 5 year average PE multiple of 23.9x). However, even at its historic PE valuations, the stock appears fairly valued. We therefore maintain our HOLD rating on the stock at the current levels.

Source : Equity Bulls

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