INSTITUTIONAL EQUITY RESEARCH Dabur India Ltd (DABUR IN...

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH

Dabur India Ltd (DABUR IN)

Extremely encouraging performance

INDIA | FMCG | Quarterly Update

2 August 2018

Top takeaways from 1QFY19 Results beat our estimates by a huge margin due to broad-based good performance

across its product portfolio. We find the two-year volume CAGR of 7.6% (21% volume growth in 1QFY19) to be extremely encouraging, despite rural areas (50% of overall sales) growing at a similar run-rate to urban areas.

We are happy to see competitive intensity abating in categories where sales were impacted by Patanjali’s pricing strategy and high-decibel ad campaigns. In fact, the ‘Patanjali effect’ seems to be waning, as the company faces supply-chain complications, quality-related issues, and as it focuses on multiple categories.

Health supplements (Chyawanprash and Honey) delivered the third consecutive quarter of c.15% revenue growth.

EBITDA growth of 25% yoy was way ahead of our estimates, despite substantial A&P spends (up 33% yoy) due to a tight lid on operating costs (staff cost / other expenses were up only 10%/5%).

International business (30% of sales) continued to recover in Q1FY19 (second consecutive quarter of +10% growth) driven by strong growth in the MENA region (appointment of standalone distributor in Saudi Arabia is aiding growth).

Best play on rural recovery: We believe the worst of the headwinds (8% EBITDA CAGR over FY14-18) – the lingering effect of demonetisation, and GST-related disruption given high dependence on the wholesale channel – are behind us. Competitive intensity should moderate now, with Patanjali facing challenges (mentioned above).

We expect consumer demand in rural areas to be much stronger in FY19, because of MSP hikes (at least 1.5x of production cost for all crops), the forecast of a normal monsoon, farm-loan waiver in key states, and higher fiscal spending towards creation of social/physical infrastructure ahead of General Elections in 2019. We see Dabur as a key beneficiary of the improving rural economy (50% of overall sales) with the right product-portfolio mix for this audience. We increase our target multiple to 45x (September 2020 EPS) from 40x earlier (June 2020 EPS), as Dabur is poised for 15%/14% EBITDA/PAT CAGR over FY18-21. Reasons: (1) Management gives preference to volume driven growth over margins. (2) Focus on new product launches (which was muted for a while). (3) Increasing distribution reach. (4) Improving distribution productivity under project Buniyaad. (5) Stability in international operations (Namaste profitability to see sharp improvement). We largely maintain our EPS estimates. It is still our top-pick within the mid-cap FMCG space. We hike our target to Rs 490 vs. Rs 425 earlier. Key risks to our call: (1) Discount-led competition by juice players (ITC etc.) to gain market share, and (2) any factor that hurts the rural economy.

Buy (Maintain) CMP RS 430 / TARGET RS 490 (14%)

COMPANY DATA

O/S SHARES (MN) : 1766

MARKET CAP (RSBN) : 694

MARKET CAP (USDBN) : 10.1

52 - WK HI/LO (RS) : 396 / 293

LIQUIDITY 3M (USDMN) : 10.5

PAR VALUE (RS) : 1

SHARE HOLDING PATTERN, %

Jun 18 Mar 18 Dec 17

PROMOTERS : 67.9 68.1 68.1

FII / NRI : 17.7 17.2 17.7

FI / MF : 8.0 8.5 8.5

NON PRO : 1.7 1.6 1.5

PUBLIC & OTHERS : 4.7 4.6 4.3

Key Financials

Rs mn FY19 FY20E FY21E

Net Sales 89,332 100,121 112,242

EBIDTA 18,799 21,532 24,364

Net Profit 15,675 17,983 20,382

EPS, Rs 8.9 10.2 11.6

PER, x 48.5 42.3 37.3

EV/EBIDTA, x 39.8 34.3 29.7

PBV, X 8.4 7.4 6.4

ROE, % 29.3 27.9 26.5

Debt/Equity (%) 15.5 12.8 10.8

CHANGE IN ESTIMATES

__Revised Est. __ __% Revision__

Rs bn FY19E FY20E FY19E FY20E

Revenue 89,332 100,121 1 1

EBITDA 18,799 21,532 (2) (1)

Core PAT 15,675 17,983 (0) 2

EPS (Rs) 8.9 10.2 (0) 2 Vishal Gutka Naveen Kulkarni Preeyam Tolia

(Rs mn) Q1FY19 Q4FY18 qoq

growth %

Q1FY18 yoy

growth %

PC yoy growth

estimates %

Comments

Volume growth (% yoy)

21 8 (4)

Strong volume growth led by strong growth across

segments

Net Sales 20,807 20,329 2 17,901 16 11

Gross Profits 10,321 10,305 0 8,755 18 10

Gross Margin (%)

49.6 50.7 -109 bps 48.9 69 bps -40 bps

Improved product mix, low cost input inventory drive

improvement in profitability

Staff costs 2,241 1,807 24 2,035 10 7

Ad spends 1,990 1,256 58 1,500 33 8

Other operating expenses 2,229 2,390 (7) 2,131 5 12

EBITDA 3,861 4,852 (20) 3,089 25 11 Operating leverage drives profitability

EBITDA margin (%) 18.6 23.9 -531 bps 17.3 130 bps 6 bps

PBT 4,022 5,026 (20) 3,378 19 9

Tax rate (%) 18.0 20.9 17.4 57 bps 357 bps

PAT 3,300 3,972 (17) 2,649 25 10


DABUR INDIA LTD QUARTERLY UPDATE

Volume growth picking up

Source: Company

Category growth rate

Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19

Growth rates Markets Domestic 8.8 (2.5) 8.5 0.5 2.4 (6.8) 0.7 (5.5) 10.7 17.7 10.0 24.7

International (reported currency) 8.8 14.8 15.7 6.0 (2.3) 6.0 - - - - - -

International (constant currency) 6.4 13.3 10.4 - - - (4.5) (2.2) 3.9 5.0 16.8 10.5

Categories

Health Supplements 9.0 (7.1) 5.0 - - (14.0) 5.0 (7.0) 3.0 19.5 14.0 27.5

Digestives 1.6 (2.4) 6.5 - - (10.0) (5.0) 4.0 11.7 19.3 7.2 21.6

OTC & Ethicals 10.8 7.5 7.1 - 11.3 (11.0) (4.0) 6.6 5.5 8.7 7.8 13.3

Hair Care 9.4 2.0 8.2 (3.0) (6.0) (20.0) (4.0) (11.0) 2.3 24.0 13.0 20.0

Home Care 12.4 8.4 19.3 2.0 20.0 (5.0) 6.5 6.2 10.1 36.0 - 17.4

Oral Care 18.7 10.5 18.3 11.6 - (5.0) 9.0 1.5 22.8 23.0 11.0 17.3

Skin Care 2.2 9.5 - - 7.0 (11.0) - 4.0 15.8 14.5 8.5 27.1

Foods 2.4 (23.7) 11.7 4.3 15.2 52.0 10.0 - 11.7 - 2.0 26.0

Contribution to domestic turnover Categories Health Supplements 16.0 25.0 16.0 12.0 15.0 23.0 17.0 12.0 15.0 24.0 17.0 12.3

Digestives 6.0 6.0 7.0 6.0 5.0 5.0 6.0 6.0 6.0 5.0 6.0 5.9

OTC & Ethicals 10.0 11.0 9.0 7.0 9.0 10.0 9.0 7.0 9.0 10.0 9.0 7.3

Hair Care 23.0 21.0 23.0 24.0 21.0 18.0 22.0 23.0 20.0 18.0 23.0 23.0

Home Care 7.0 6.0 6.0 6.0 8.0 6.0 6.0 7.0 8.0 7.0 5.0 6.8

Oral Care 16.0 14.0 15.0 16.0 16.0 15.0 16.0 18.0 19.0 16.0 17.0 17.0

Skin Care 4.0 6.0 5.0 5.0 5.0 6.0 5.0 5.0 5.0 6.0 5.0 5.4

Foods 18.0 11.0 19.0 24.0 21.0 17.0 19.0 22.0 19.0 14.0 18.0 22.3

Source: Company PhillipCapital India Research

8%

5% 7% 8% 7%

5% 4%

7%

4% 5%

-5%

2%

-4%

7%

13%

8%

21%

-10%

-5%

0%

5%

10%

15%

20%

25% Domestic volume growth (%)



Conference Call takeaways Rural areas grew at similar rate (24%) as urban; however, management

expects rural growth to outpace urban growth by 2-3% in the rest of FY19, driven by increase in government spending, good monsoon, and higher MSP.

Expect raw material inflation to inch-up in 2QFY19

Domestic business Health care (32% of FY18 domestic sales)

Health supplements (17% of FY18 domestic sales) grew by 28%, led by strong double-digit growth in honey (c. 42% yoy) and Chyawanprash. It has regained lost market share in honey from Patanjali through price cuts, improving product quality, and effective marketing strategy.

Disgestive (6% of FY18 domestic sales) grew by 22% driven by strong performance in Hajmola. It launched Dabur Hajmola Chat Cola in Q1FY19 along with Dabur Hajmola Amrud in FY18, which saw good traction, leading to market-share gains.

OTC and Ethicals (6% of FY18 domestic sales) grew by 13% and 23% led by

Honitus and others. Dabur Honitus Hot Sip (Kaadha) which was launched in FY18 has seen a strong response from customers, which further boosted growth in OTC.

Home and personal care (50% FY18 domestic sales)

Home care (7% of FY18 domestic sales) grew by 17%, mainly led by Odonil and Sanifresh.

Hair care (21% of FY18 domestic sales) saw strong growth double-digit in hair oils (c.19%) and shampoo (c.30%). Focused marketing initiatives and improved bottle saliency led shampoo growth; Dabur gained 70bps market share on price-warrior brands (Sarson and Brahmi hair oil), traction in the coconut hair oil segment, and A&P support for Dabur Amla.

Oral care (17% of FY18 domestic sales) grew by 17% led by Dabur Red toothpaste, while Dabur Red Gel (launched in FY18) grew reasonably. Babool declined marginally because of competitive intensity in the category, but to bring back growth, it will re-launch Babool with a new formulation in FY19. Colgate (which has been aggressive in terms of pricing on the herbal side) is putting pressure on economy brands, but Dabur plans to mitigate the impact through higher ad-spends and product activation.

Foods (18% of FY18 domestic sales)

Beverages grew by 27% driven by strong double-digit growth in Real and Activ; higher ad-spends, new product offerings, and discounts, led to regained lost market share from discount players (Paper Boat). It launched Real Ethnic Range – Masala Guava, Masala Pomegranate, and Alphonso Mango in Q1.

International business:

MENA saw healthy traction due to appointment of Separate distributor in Saudi Arabia and higher crude oil price support recovery in the region. Egypt/Saudi Arabia grew 31%/54% respectively.

Namaste reported low single-digit growth, reversing the declining trend of last year, but the company expects Namaste to turnaround, both in terms of revenue and profitability in FY19, due to localized manufacturing, launch of Curls Unleashed (natural product), tie-up with Wal-Mart, and increased geographical salience from the high-margin Africa region.



Two-year forward P/E band EV/EBITDA band

Source: PhillipCapital India Research Estimates

12x

24x

36x

48x

0

50

100

150

200

250

300

350

400

450

500 Rs

9x

18x

27x

36x

0

200000

400000

600000

800000 Rs mn



Financials

Income Statement Y/E Mar, Rs mn FY18 FY19E FY20E FY21E

Net sales 77,231 89,332 100,121 112,242

Growth, % 0.6 15.7 12.1 12.1

Other income 252 0 0 0

Total income 77,483 89,332 100,121 112,242

Raw material expenses -38,464 -44,245 -49,203 -54,810

Other Operating expenses -22,845 -26,288 -29,385 -33,067

EBITDA (Core) 16,174 18,799 21,532 24,364

Growth, % 7.2 16.2 14.5 13.2

Margin, % 20.9 21.0 21.5 21.7

Depreciation -1,622 -1,747 -1,888 -2,045

EBIT 14,553 17,053 19,645 22,319

Growth, % 6.5 17.2 15.2 13.6

Margin, % 18.8 19.1 19.6 19.9

Interest paid -531 -481 -489 -497

Other Non-Operating Income 3,052 3,021 3,323 3,656

Pre-tax profit 16,929 19,593 22,479 25,477

Tax provided -3,354 -3,919 -4,496 -5,095

Profit after tax 13,575 15,675 17,983 20,382

Net Profit 13,575 15,675 17,983 20,382

Growth, % 7.2 14.2 14.7 13.3

Net Profit (adjusted) 13,720 15,675 17,983 20,382

Unadj. shares (m) 1,762 1,762 1,762 1,762

Wtd avg shares (m) 1,762 1,762 1,762 1,762

Balance Sheet Y/E Mar, Rs mn FY17 FY18E FY19E FY20E

Cash & bank 3,061 21,059 31,570 46,463

Debtors 7,061 9,721 10,457 11,248

Inventory 12,562 12,168 12,168 12,168

Loans & advances 5,585 5,585 5,585 5,585

Total current assets 28,268 48,533 59,779 75,463

Investments 38,052 11,416 11,416 11,416

Gross fixed assets 30,458 32,958 35,958 38,958

Less: Depreciation -10,177 -11,923 -13,811 -15,856

Add: Capital WIP 415 415 415 415

Net fixed assets 20,696 21,449 22,562 23,516

Total assets 87,016 81,398 93,756 110,395

Current liabilities 19,898 18,023 19,341 23,468

Total current liabilities 19,898 18,023 19,341 23,468

Non-current liabilities 9,792 9,641 9,641 9,641

Total liabilities 29,690 27,664 28,982 33,109

Paid-up capital 1,762 1,762 1,762 1,762

Reserves & surplus 55,299 51,707 62,747 75,259

Shareholders’ equity 57,326 53,734 64,774 77,286

Total equity & liabilities 87,016 81,398 93,756 110,395

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY18E FY19E FY20E FY21E

Pre-tax profit 16,929 19,593 22,479 25,477

Depreciation 1,622 1,747 1,888 2,045

Chg in working capital -1,734 -4,292 583 3,336

Total tax paid -3,354 -3,919 -4,496 -5,095

Other operating activities -1,334 -1,346 0 0

Cash flow from operating activities 12,129 11,783 20,454 25,763

Capital expenditure -2,313 -2,500 -3,000 -3,000

Chg in investments -5,650 26,636 0 0

Cash flow from investing activities -7,963 24,136 -3,000 -3,000

Free cash flow 4,166 35,919 17,454 22,763

Equity raised/(repaid) 787 0 0 0

Debt raised/(repaid) -827 0 0 0

Dividend (incl. tax) -7,413 -2,602 -6,435 -7,342

Cash flow from financing activities -7,435 -2,602 -6,435 -7,342

Net chg in cash -3,269 33,317 11,019 15,422

Valuation Ratios

FY17 FY18E FY19E FY20E

Per Share data EPS (INR) 7.8 8.9 10.2 11.6

Growth, % 7.2 14.2 14.7 13.3 Book NAV/share (INR) 32.4 30.4 36.6 43.7 FDEPS (INR) 7.8 8.9 10.2 11.6 CEPS (INR) 8.8 9.9 11.3 12.7 CFPS (INR) 5.9 5.7 9.7 12.6 DPS (INR) 4.0 1.3 3.1 3.6 Return ratios

Return on assets (%) 16.9 19.0 20.9 20.3 Return on equity (%) 24.0 29.3 27.9 26.5 Return on capital employed (%) 22.0 24.5 26.5 25.6 Turnover ratios

Asset turnover (x) 3.3 3.3 3.4 3.9 Sales/Total assets (x) 0.9 1.1 1.1 1.1 Sales/Net FA (x) 3.8 4.2 4.5 4.9 Working capital/Sales (x) 0.1 0.1 0.1 0.0 Fixed capital/Sales (x) - - - - Working capital days 25.1 38.6 32.3 18.0 Liquidity ratios Current ratio (x) 1.4 2.7 3.1 3.2 Quick ratio (x) 0.8 2.0 2.5 2.7 Interest cover (x) 27.4 35.5 40.2 44.9 Dividend cover (x) Total debt/Equity (%) 14.5 15.5 12.8 10.8 Net debt/Equity (%) 9.2 (23.9) (36.1) (49.6) Valuation PER (x) 55.5 48.5 42.3 37.3 Price/Book (x) 13.3 14.2 11.8 9.9 Yield (%) EV/Net sales (x) 9.9 8.4 7.4 6.4 EV/EBITDA (x) 47.4 39.8 34.3 29.7 EV/EBIT (x) 52.7 43.9 37.6 32.4



Stock Price, Price Target and Rating History

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year.

Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

B (TP 325) B (TP 310)

B (TP 285) B (TP 285)

B (TP 300)

N (TP 315) N (TP 315)

N (TP 300) N (TP 300)

N (TP 330)

N (TP 345) N (TP 375) M-18

50

100

150

200

250

300

350

400

450

A-15 S-15 N-15 D-15 F-16 M-16 M-16 J-16 A-16 S-16 N-16 D-16 F-17 M-17 M-17 J-17 A-17 S-17 N-17 D-17 F-18 M-18 M-18 J-18



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Vineet Bhatnagar (Managing Director)

Kinshuk Bharti Tiwari (Head – Institutional Equity)

Jignesh Shah (Head – Equity Derivatives)

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Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in

For U.S. persons only: This research report is a product of PhillipCapital (India) Pvt Ltd., which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S.-regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances, and trading securities held by a research analyst account.

This report is intended for distribution by PhillipCapital (India) Pvt Ltd. only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by the U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated, and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain

business with Major Institutional Investors, PhillipCapital (India) Pvt Ltd. has entered into an agreement with a U.S. registered broker-dealer, Decker & Co, LLC. Transactions in securities discussed in this research report should be effected through Decker & Co, LLC or another U.S. registered broker dealer.

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This report contains general securities advice and does not take into account your personal objectives, situation and needs. Please read the Disclosures and Disclaimers set out above. By receiving or reading this report, you agree to be bound by the terms and limitations set out above. Any failure to comply with

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