Dabur India Ltd - Q2FY21 Result Update - YES Securities

Multiple engines firing simultaneously; well placed to deliver industry-leading earnings growth in medium term; Buy on dips

- Quarter highlights- Strong earnings beat with revenue/EBITDA/PBT growth of 14%/16%/18% led by a higher than expected 16.8% domestic volume growth and 19.8% domestic value growth; margin improvement of 50bps to 22.6% despite flat gross margins at 50.9% and 150bps increase in ad spends led by strong cost controls; healthcare segment grew 49% led by supplements (71% growth) , OTC (56% growth) and ethical (26% growth), HPC grew 9% led by oral care (24% growth and 90bps market share gain) and shampoo (18% growth and 80bps share gain) and foods declined 4% led by juices (8.5% growth ex-HORECA with juice share gain of 180bps); international business saw CC growth of 3.5% given challenges in MENA.

- Management commentary - Used the crisis to become more agile, nimble, aggressive; complete cultural transformation; aggression on innovation to continue; e-commerce growth of 200% which is now 6% of sales; will focus on enhancing distribution efficiency across channels; digitization and cost optimization initiatives to continue.

- Oral care - Market grew 5% (naturals segment which is 28% of toothpaste market is growing at 8%) while Dabur grew 10% as per Nielsen which indicates that Dabur is gaining significant market share led by Dabur Red and premium launches; revamped both Babool and Meswak; secondary growth higher than primary given pipeline correction.

- New products - Sanitize is a master brand being created for home sanitization and hygiene products to compete with the likes of Reckitt; sanitizer sales and margins have come down with multiple players entering (12cr in 2Q vs 80cr in 1Q) but other products doing well.

- Chyawanprash and Honey outlook - 2x growth in Chyawanprash; 2% penetration has increased to 3.5-4% which can increase significantly using LUPs; 100% in-house proprietary manufacturing; double-digit growth in Honey; 25% penetration has increased significantly during COVID; more players coming in will help in category expansion.

- Margin outlook and A&P spends - Still believe are much lower than competition on ad spends at about 8% which will be increased going forward; not looking at significant margin expansion and will keep investing efficiency gains in brand building and new product development.

- Foods business - Juices ex-HORECA growing at 6.5%, OOH (one-third) growing at 3.5%, in-home growing at 11.5% (two-third), hoping to get into sustainable double-digit growth with new launches; foods ex-HORECA growing at 8.5% led by culinary brand HOMMADE.

- Input costs/procurement - 50% of RMs are agri-linked which are witnessing inflation now which will necessitate some price hikes; evaluating possible solutions to benefit from agri-reforms.

- Criteria for selection of new launches - Looking at segments with low competitive intensity, high margins and scalability potential with e-commerce distributability.

- Current success in new categories - Pet bottle juices, health juices, kwath, pickles doing well, vinegar; most are niche small categories as of now.

- Demand momentum across channels - Urban GT growth came back with 18% growth; rural GT grew 25%; MT grew at only 2%, Cash n Carry only 10% growth, institutional, CSD (3% share) and HORECA (3% share) business continue to decline; growth momentum sustained in October as well.

- International business - Middle East facing crude and population attrition headwinds; now seeing some recovery; SAARC, Bangladesh, Turkey, other geographies doing well.

- Innovation and power brands - Doing line/brand/SKU extensions of all power brands - Real (pet bottles, frappe), Amla (aloe vera, badam oil), Hajmola (Chatkola, Limcola), Honitus (Hot Sips), Dabur Healthcare (Suraksha Tea, honey tea); only new big brand is Sanitize.

- Inventory loading impact - Much lower festive inventory filling as Diwali was postponed this year; corrected inventory pipeline by 9 days.

- Distribution expansion - Direct reach has increased from 1.2mn to 1.3mn; will increase to 1.4mn by FY22; rural reach will be 60k villages by FY21-end and reach 80k in two years.

- Valuation and view - The stock is currently trading at a rich multiple 48x/42x FY22/23E earnings, which indicates that future stock returns will predominantly be a function of earnings growth, which should be best-in-class for the next 2-3 years. With multiple engines like healthcare, oral care, shampoo firing at the same time coupled with multiple margin levers and aggressive innovation, Dabur looks set to deliver 15-20% earnings growth and remains a strong buy on dips stock despite seemingly rich valuations.

Shares of DABUR INDIA LTD. was last trading in BSE at Rs.517.5 as compared to the previous close of Rs. 506.15. The total number of shares traded during the day was 318039 in over 6461 trades.

The stock hit an intraday high of Rs. 523.25 and intraday low of 509.75. The net turnover during the day was Rs. 164545220.

Source : Equity Bulls

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