Dabur – Significant transformations underway
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With the COVID-19 crisis having impacted nearly every industry, we were interested in learning the strategies being adopted by large corporates to cope with the changing times. To understand the extent of transformation taking place and to obtain a longer-term perspective on Dabur’s prospects, we interacted with the company’s CEO, Mr. Mohit Malhotra. The discussion also addressed our concerns on factors that we believed were holding the company back. Key insights highlighted below:
* Ayurvedic products are witnessing strong traction (expect revenues at 35% of sales in FY21 v/s ~30% in FY20). Mr. Malhotra believes not only is this good news because of elevated sales growth but also because the segment is more profitable than the rest of the portfolio.
* The company is doing stellar work on erstwhile relatively weak areas such as direct reach and technology & analytics (DT&A) in distribution. Dabur is aiming to increase direct reach to 1.5m (from 1.2m in FY20) over the next 2 years. Also, it is targeting to be in line or better than domestic peers in DT&A over the next 6-8 months.
* Sales from new launches are targeted to reach ~5% of total sales in 2 years (from 2% in FY20).
* Mr. Malhotra believes that currently Dabur is less efficient than peers on several operating costs. We have seen with peers, particularly in case of HUVR and BRIT, how much can be extracted on the costs front to reinvest in growth. Targeted cost savings for FY21 stands at INR800m-1b, which Mr. Malhotra believes is an encouraging start and waiting to be expanded significantly. The cost savings will be primarily used to increase ad spends (as % of sales), which are currently lower than peers.
* As guided in the 4QFY20 post results call, 1QFY21 sales will be affected due to delay in classification (by the authorities) of Ayurvedic products as essentials. However, outlook beyond the quarter is good. The MENA business (the largest part of Dabur's international business) is the only concern for the current year.
* Valuation and view: In our earlier note on the analyst meet in Sep'19, we had highlighted the winds of change blowing inside Dabur India from the time the new CEO took over in Apr'19. The company has been re-energized with (a) renewed focus on the Ayurvedic healthcare products business (30% of FY20 domestic sales), (b) implementation of the power brand strategy leading to far sharper focus than in the past, (c) increasing appeal to the millennial through sampling, better communication and improved availability of Dabur's products, and (d) sharp pickup in pace of new launches (which was duly delivered on the launches front in FY20). Unveiling of plans to plug the gaps on direct reach and T&A are highly encouraging too.
* If the intended transformation on all the above fronts is executed well, Dabur, in our view, appears one of the most exciting investment opportunities in the Indian consumption space over the next 4-5 years with potential earnings growth of 15-20% CAGR.
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