Weekly Tactical Pick | Dabur: Broadening of growth categories

March 15
11:25 2019

In this edition of our weekly tactical pick, we would like to highlight a consumption stock – Dabur. Its domestic business growth in recent times has displayed a broad-based volume growth trajectory. In the quarter gone by, sales were aided by 12.4 percent volume growth despite a high base (13 percent) in the same period last year. The company also witnessed higher pricing gain (2.5 percent) compared to what was witnessed in the past many quarters.

What adds to our conviction:

Higher rural growth:

Rural sales growth for the company remains ahead of urban growth by 3-4 percent. Adjusting for modern trade, rural growth is still ahead of urban by about two percent. The management expects this high single-digit volume growth to continue, which can extend to double-digits if the rural focused policy measures from the government materialise.Strong stay in Naturals:

Competitive intensity has decreased in some categories in the last few quarters where Patanjali Ayurved was a core challenger. In the healthcare segment (36 percent of sales), the company posted 16 percent value growth in Q3 led by double-digit growth in Chyawanprash and honey. In fact, health supplement sales, as per our estimates, are past historic peak levels, suggesting recoup of market share loss to a great extent.

Personal care – not just oral care growth

Home and personal care segment (47 percent of sales) grew well by 16.3 percent year-on-year in Q3 FY19, aided by hair oil market share gains and stellar showing in the shampoo category. Over the last few quarters, there has been a strong performance across categories – not just in oral care –but also in the home and personal care. Two-year compounded annual growth rate (CAGR) for these categories -– hair, skin, oral care — are in mid to high teens. In case of hair care, there has been a good come back looking at the longer time scale.Outlook

We are constructive on the stock as the intertwined factors of distribution reach (direct reach at one million outlets) and rural exposure (around 45 percent of sales) are positive for the company. In this context, the company remains a key beneficiary of rural focus in the Indian polity, which should lead to series of policy initiatives on this front. We expect earnings CAGR of over 20 percent for the next two years, similar to that for market leader Hindustan Unilever (HUL).

In contrast this, the Dabur stock is currently trading at 41 times FY20 estimated earnings, which is at a discount of around 20 percent to that of HUL.

In the last few quarters, we have witnessed broadening of growth drivers for the company and hence the stock can be accumulated at current levels.

Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here.

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