As dark clouds fade, analysts are betting on this $10 billion FMCG behemoth


The share price of over $10 billion FMCG behemoth Dabur India has fallen over 5 percent so far in 2019 but slowdown fears that clouded the outlook seem to be fading away as experts expect double-digit revenue and profit growth in the next 1-2 years.

Dabur India has a diversified product portfolio, strong distribution network, and traction in Ayurveda-based products. The long-term outlook for the industry remains bullish. Currently, the stock is trading at 39.6x FY20E and 33x FY21E earnings.

HDFC Securities estimates CAGR in revenue and net profit at 13 percent and 22 percent, respectively, over FY19-21E, while margin is expected to expand 230 bps over the same period.

“Dabur has corrected recently with the market and now it is trading at its almost 2-year average valuations. We think this is an opportunity to enter into the stock for sustainable long term returns,” said the note.

HDFC Securities recommend a buy on Dabur at CMP and on dips towards Rs 380 for a target price of Rs 475 over the next four quarters, which translates into an upside of 16 percent from June 10 closing price of Rs 408.

Another brokerage firm, Citigroup has also maintained its buy call on Dabur India with a target of Rs 455. Trends in the last two months are slightly better compared to slowdown seen in March, which is a positive sign, it said in a note.

Expanding project rise, a large opportunity for the company in the South, and strategies of increasing direct coverage have aided growth as well as profitability, added the note.

HDFC Securities lists five investment rationale to buy Dabur at current levels: Diversified product portfolio and strong distribution network:

With 135 years of lineage, the company has created its presence across Hair Care, Oral Care, Health Care, Skin Care, Home Care and Foods segments.

Dabur is India’s most trusted name and one of the world’s largest Ayurvedic and Natural Health Care company. The company enjoys a market leadership position in key categories across its diverse product portfolio.

Ayurveda-based products have been gaining traction:

Ayurveda-based products have been gaining traction in India over the past few years on account of rising awareness about the harmful effects of chemicals and allopathic medicines, coupled with an increasing number of product innovations by companies.

The pace of growth is expected to continue in the years to come with a rise in the number of young people beginning to embrace this traditional medicine.

The government has also been making concerted efforts towards encouraging and promoting usage of Ayurvedic products through education and national awareness programmes.

Out of the dark clouds:

Dabur has witnessed many challenges in its business during the last 2-3 years, on account of slow rural demand, disruption owing to Patanjali, the greater impact of demonetisation than other peers owing to high wholesale dependence and weak international business.

As a result, Dabur could not see growth as expected. But now domestic business is witnessing consistent recovery driven by volume growth. We expect double-digit value growth in the medium term.

Growth opportunities in the Indian FMCG market:

Most of the FMCG Companies’ Q4FY19 results were not up to the mark. Volume growth was a major cause of concern as they were at a multi-quarter low. The reason for the lower than expected growth was slower demand form rural side and an overall slowdown in the economy.

For the near future also, companies have given a cautious outlook; how the monsoon season pans out will be crucial. This has led to a sharp fall in FMCG stocks (barring a few) from the recent highs.

Dabur has also corrected and is now trading at almost 2-year average valuations. This we think is an opportunity to enter the stock for sustainable long term returns.

Brand building initiatives:

Mohit Malhotra’s (new CEO) focus will be on consolidating advertising and promotional investments, i.e., disproportionate investments on power brands (like Dabur Amla, Dabur Red, Real, etc.) instead of that on marginal brands.

The management believes that these power brands (strong brand equity) have a large addressable market and hence, there is an opportunity to gain scale with increased support from investments.

This initiative is already yielding positive results in many brands with strong double-digit growth during the last year.

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