Dabur - Stuck in the mass market - Ambit

Dabur's sales growth is expected to moderate from 21% CAGR (supported by M&A) over FY08-13 to 14% CAGR over FY13-15. More than two-thirds of Dabur's domestic product portfolio positioning does not leave much scope for premiumisation or market share gains. Also, the drag on its international business from Namaste is unlikely to recede over the next 12 months. The stock is currently trading at an 16% discount to its peer group average (based on its 1-year forward P/E). We believe this is justified given the company's relatively weaker cash generation and growth profile. We initiate coverage with a SELL stance.

Whilst Dabur has reported revenue CAGR of 21% over FY08-13, supported by international acquisitions. We expect a moderation in growth from 16% YoY in FY13 to 13.8% over FY13-16 due to :

Weak portfolio positioning: 45% of Dabur's domestic revenues comes from oral care, hair care and skin care, which face headwinds from a combination of mass-market positioning, intense competition from Colgate, Marico and HUL, and relatively high penetration of these segments (especially in urban India). Another 23% of the portfolio includes health supplements and digestives, which offers no scope for premiumisation. Moreover, products such as Hajmola have achieved more than 80% market penetration in India and Glucose-D faces tough competition from Heinz's Glucon-D. These factors limit Dabur's scope for strong revenue growth, gross margin benefits and better defense against competition. The juices and home care segments (15% of consolidated revenues) remain the only two areas of strength in its portfolio.

Capital allocation risk: Based on our capital allocation analysis, whilst Dabur's organic expansion in the Middle East has performed well in the past, its capital deployment towards M&A, especially for the Namaste business has been disappointing so far, due to: (a) distribution-related disruptions; (b) rebranding of the US portfolio in FY13 due to regulatory constraints; and (c) fairly large management reshuffles in the US business. Hence, Namaste's growth rates are unlikely to normalise for at least another 12 months. With ~Rs. 10bn of surplus capital currently on the balance sheet which will most likely be deployed towards M&A in India in the coming years, Dabur will face a capital allocation risk.

Valuation: Dabur currently trades at 31x FY14 earnings, towards the bottom end of the FMCG sector range. Given the factors highlighted above, we believe this discount is justified. Our DCF-based valuation generates a target price of Rs. 136 (14% downside), implying 26.8x FY14 P/E.

Source : Equity Bulls

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