Dabur India Ltd. (Dabur) is one of the leading FMCG companies in India with revenue of over Rs 7,680 crore and market capitalisation of over Rs 48,800 Crore. Dabur is the world’s largest Ayurvedic and Natural Health Care Company with a portfolio of over 250 Herbal and Ayurvedic products. Dabur also recommends various Ayurvedic Home Remedies formulated using ayurvedic plants and herbs which are natural and chemical free. Dabur has two divisions in India: consumer care division and foods division apart from its international operations.

The consumer care division (CCD) offers a wide range of products in hair care, oral care, health supplements, digestives and candies, baby care, and skin care products based on ayurveda, over‐the‐counter (OTC) products, Asavs, and branded ethical and classic products. Consumer Healthcare division has been merged with CCD to leverage distribution.

The second division, Dabur Foods Ltd produces fruit juices, cooking pastes, sauces, and items for institutional food purchases. Dabur is well placed among its consumer goods peers because of its positioning as an Indian company whose products are derived from exotic sources such as ancient ayurvedic texts and natural ingredients such as herbs. Its FMCG portfolio includes five flagship brands with distinct brand identities -- Dabur as the master brand for natural healthcare products, Vatika for premium personal care, Hajmola for digestives, Réal for fruit-based drinks and Fem for fairness bleaches and skin care.

The ayurvedic company has a wide distribution network, covering six million retail outlets with a high penetration in both urban and rural markets. Dabur's products also have huge presence in the overseas markets and are today available in over 120 countries across the globe. Its brands are highly popular in the Middle East, SAARC countries, Africa, US, Europe and Russia. Dabur's overseas revenue today accounts for over 30 per cent of the total turnover.

Dabur’s consolidated net revenue contracted by eight per cent YoY to Rs 1790 crore. EBITDA declined by 11 per cent, while other income grew 33 per cent to Rs 81.3 crore. APAT was down by 5 per cent to Rs 276 crore.

The company’s volumes were better compared to its peers. Volumes for Emami, Marico and Colgate plummeted by 18 per cent, 9 per cent and 5 per cent, respectively. The FMCG company will stick to its 5 to 10 per cent volume guidance which should be second half heavy. The company will need to achieve volume growth of 8 per cent YoY to reach overall volume growth.

Investment Rationale

Dabur’s broad product portfolio provides a good play on Indian Consumer Goods spend by its strong presence in less penetrated and high growth categories. The company is set to benefit from recovery in rural growth aided by rural‐centric initiatives announced in the Budget, which contributes 45 per cent to total sales and a good monsoon.

Dabur’s positioning on the ‘health and wellness’ platform, backed by its ayurvedic, natural and herbal (ANH) image is very progressive. This, combined with its demonstrated ability to create new categories and sub‐categories, makes it well‐placed to capture lifestyle changes‐led growth in the consumer goods space.

The company has also demonstrated its ability to make and integrate smart acquisitions (Balsara) that complement its product portfolio and thereby drive inorganic growth.

Initially, Dabur had intensified competition from Patanjali. However, now the company has stopped losing market share and the competitive intensity has also waned. To capitalise on this, the company will be launching ayurvedic‐based products in categories such as oral care, hair care, health supplements, et al, which is envisioned to shoot overall growth.

The company has a wide product basket, along with a balanced mix of both urban and rural markets. A meaningful improvement in consumer off take is a positive, and could reflect in Dabur’s performance in the coming quarters.

Gross Margins

The higher promotional expenses impacted gross margins, that contracted by 185bps. Additionally, the promotional offers would reduce in the coming quarters. The company maintained ad spends at 9.6 per cent of sales in India but the same dipped in the international business. The gross margins may expand on the back of benign raw material prices.

EBITDA margins

EBITDA margin was down by 61bps to 17.3 per cent and still stood at a strong level. EBIT pressure was owing to weak revenue performance.

Advertising and sales promotions (ASP) expense declined by 24 per cent and stood at 8.4 per cent of sales. The ASP expenses are expected to increase owing to new launches and aggressive marketing and the other expenses de grew nine per cent. However, Dabur will increase media spends and increase in salary expense which may not lead to EBITDA margin expansions. The margins would likely be at same levels as 2017 provided competitive intensity except for foods segment does not increase.

The standalone employee expense has seen an increase due to some shift from other expense to staff expense owing to move from contract basis to employees coming on Dabur’s roll and increase in number of employees. However, on consolidated level there has been a reduction at international level.

The improvement in margins of foods and international businesses are expected to result in improvement in margins for the consolidated operations. The focus on strengthening its innovation pipeline, especially in natural segment, and premiumising the same will not only help the company gain share in naturals and ayurveda, but also aid margin improvement.

Domestic FMCG business

Dabur’s domestic business, which contributes 66 per cent of sales, de-grew by five per cent, with decline of 4.4 per cent in volume growth owing to channel destocking. Although the primary sales dipped five per cent, on the other hand, the secondary sales grew 2 per cent YoY. The growth in MT was 5.8 per cent.

The Consumer care segment has seen a delay in recovery. The domestic consumer business was heavily impacted by channel destocking. In the month of May and June, the company witnessed very high promotional intensity. Overall destocking was of Rs 100 crore. Netting off pipeline reductions, volume offtake was in positive territory.

From second quarter of 2018 onwards, with GST roll out, optically sales may look lower by six per cent since VAT, which was earlier added in top line, will not be added.

The nature of promotions may change in GST owing to the way laws have been framed. The off invoice will become 14 to 15 per cent more expensive. Hence, promotions will shift from off invoice to on invoice. Going forward, 50 per cent of off invoice promotions will move to on invoice.

Dabur has not taken price increase irrespective of rate increase. The blended price hike is 1.2 per cent, but owing to promotional intensity that is not getting reflected. There is a possibility of rate increase in the third quarter of 2018 and for fiscal 2018, price hikes will be about two to three per cent.

International business

The international business of Dabur remained under pressure, owing to geo-political issues and unfavorable currency movements. The business declined by 2.2 per cent YoY in constant current terms; it was impacted by the slowdown in Middle East and North Africa (MENA). The growth in local currency in many geographies was healthy. Nepal saw double digit sales growth followed by 15 per cent in SAARC. Turkey witnessed seven per cent growth in and Egypt posted three per cent. The Gulf countries de-grew by 13 per cent.

There are several geographical expansion opportunities in North Africa, Turkey and Iran. Dabur is focusing on increasing product lines, range selling and penetration of its brands. Dabur’s Namaste business is seeing some steady pick up; however, the Company believes that their naturals portfolio will be recalibrated and bring growth in North America geography. This business is expected to improve led by recovery in Namaste business, though overall geopolitical conditions in the Middle East need to be closely monitored.

Waka Waka Africa!

Dabur will expand its base in Africa with two more acquisitions and expects their Africa business will grow at the same pace as North America business.

During the quarter, the FMCG giant acquired 100 per cent stake in D&A Cosmetics Proprietary Ltd and Atlanta Body and Health Products Proprietary Ltd. Both companies are owned by Bodenstein Family of South Africa. The Companies operate the brand Long & Lasting, which offers a range of hair care products to African consumers. Total consideration for the acquisition is ZAR 50 million (USD 3.7 million) at 2.2 times sales and 13 times EBITDA.

Oral care

The toothpaste category grew by 10.4 per cent YoY, this was encouraging, especially when Colgate clocked a 4 per cent decline.

Toothpowder, which is 11 per cent of oral care, plummeted 35 per cent YoY. This decline in toothpowder resulted in 1.5 per cent YoY growth in the oral care business.

The newly launched Red Gel has performed well with good sales despite limited launch, its pan-India rollout is underway. The company is working on reinvigorating Babool brand. The company has countered rising competition by enhancing its promotional spending, which has helped wrest back market share, though it will now reduce promotion spend and focus more on media spends, which is a superior strategy and will increase overall visibility of brands.

Dabur is also considering introducing White ayurvedic toothpaste; however, its real threat is from Patanjali since there is still strong traction for that brand.

Healthcare

The health supplements category declined by seven per cent YoY impacted by short summers and early rains. The market share in Honey has stabilized and expects sharp improvement in market share. Broadly, the company continues to give 25 to 30 per cent more as promotion.

Over-the-counter (OTC) and ethical dipped by 6.6 per cent YoY. The digestives business posted four per cent YoY growth driven by Hajmola and Pudin Hara. The focus on OTC & ethicals, health supplements and foods businesses, further bolstered by Project CORE will play a key role in driving premiumisation for Dabur. Project LEAD and rising coverage of doctors will boost healthcare products.

Dabur has been rolling out the multi-distributor model in key markets. The portfolio is being split across distributors to ensure adequate focus on the brands and enhance distribution reach. The e-commerce channel in MENA region is growing in strong double digits and Dabur plans to tap the same. Additionally, smart usage of resources is considered to build brands and support above-the-line and below-the-line activities in challenging market conditions.

Hair care

Dabur’s Hair Care category declined 11 per cent YoY. Its brands Sarson Amla, Brahmi Amla and Almond Hair oil performed well despite uncertainty and down stocking of inventory.

Dabur did not retaliate to competition from Marico in time. But the same will not be repeated in juices category.

Home and Skin Care Categories

The Home category grew by 6.2 per cent YoY. The Odomos brand has started to begin its full potential. It has been doing good and this franchisee has been on a strong footing.

The Skincare category grew by 4 per cent YoY helped by double digit growth in Gulabari and Fem bleaches.

Food and Beverages segment

The beverages segment de-grew by 8.3 per cent YoY decline in sales. The secondary growth was 4 per cent YoY. The foods category was impacted by major de‐stocking and heightened discounting by competition. In North & Central India, early monsoon in June has impacted sales.

The overall juice category has seen lot of promotional intensity and massive destocking. There is no price increase expected in the category. B’natural has nine per cent market share, which has increased the competitive scenario and the new flavors such as Real Mosambi and Real Wellnezz have performed well. At the wholesale level, juices are managed by fat dealers; this kind of dealers specialize in carbonated, NCB and juice category.

In coconut water company, there are many supply constraints; however, once this is solved, the company will be able to double the growth rate. Next year, Dabur will be able to take the volume up by two to three times.

CSD Channel

Canteen Stores Department (CSD) contributes five to six per cent of revenue. The channel was weak; realisation in this segment is little lower than general market and the company expect a delay in its recovery. As per management, government is reducing the budget and process for CSD.

Going forward, the channel will shrink and is even instructed by the Ministry of Defence since the Ministry believes there are some irregularities. The off-take directly to Jawans and Army continues and higher salience in CSD are Amla and Honey lower in Juice and Chawanprash.

Wholesale Channel

The channel has been in worse condition; presently, it’s not showing signs of improvement and has a long way to go before it can see the sun shining. The wholesale medium is not comfortable with full compliance yet and is most likely to shrink. The impact on wholesale channel was higher in North and East.

This implies that Dabur will have to re‐channelise its distribution network. Wholesale is 35 per cent and MT is 15 per cent, of which four per cent is wholesale cash and carry. The super stock is about one-third which more so works like wholesale and direct distribution is 950,000. The cost is increased to compensate for margin to wholesalers would be one per cent.

Inventory Levels

Dabur’s inventory levels are at three times at which the market leader Hindustan Unilever (HUL) operates. The inventory days are compressed by seven to eight days and the company believes the inventory days may stay at these levels. Inventory at distributor is 18 days.

Capital Investment

The facilities in Sri lanka and Uttarakhand factory have commenced and two tetrapack lines in Uttarakhand. For the current financial year 2018, the capital expenditure Capex would be Rs 300 crore.

Positive Stance

Over the upcoming 2017-20 period, Dabur is expected to witness 17 per cent earnings per share (EPS) CAGR and its domestic and international revenue are expected to show 12 per cent CAGR each. Better revenue growth, stable inflation and favorable product mix would expand EBITDA margin by 180bps over this period.

The company is backed by strong revival in volume off take and improving market share. The current fiscal year 2018 would see strong innovations. Dabur commands a high operating margin of more than 19 per cent, along with return on capital employed (RoCE) of more than 45 per cent.

Key Risks

A slowdown in rural demand due to lower government spending or monsoon failure could impact Dabur’s revenues significantly. In addition to this, further rise in competitive intensity in categories like Shampoo, Oral care, hair oils, juice may put pressure on volumes. Dabur’s peer ITC has come out with aggressive ads and national rollout.

neha.seth@outlookindia.com