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POWERing ahead by leveraging its core strengths

Potential for sustained double-digit topline growth; attractive at current levels

We reiterate our BUY rating on DABUR with a TP of INR705, implying 29% potential upside. Our investment thesis on DABUR is premised on the following key attributes: a) highest topline growth visibility among peers, b) consistent market share gains across categories, and c) potential to record even faster earnings growth post-completion of its ongoing investment phase.

The key catalysts that underpin a sustained double-digit topline growth for DABUR include: a) an impressive performance in the Ayurvedic healthcare space, b) an encouraging output from the Power Brand strategy, c) an improving outlook for the F&B business, and d) a host of new launches by the company. In fact, DABUR is on track to deliver a double-digit sales growth in FY22E, a feat achieved in two out of three years since the then new CEO took over.

The recent stock price correction of ~15% from its peak offers an attractive entry point in our opinion with the stock now trading at 39x FY24E P/E, a discount of 15%/20% to its historical three/five-year averages, respectively.

DABUR is among our top two picks in the Staples space along with Godrej Consumer (GCPL)

Focus on core competencies paying dividends

Ayurveda at the forefront – The CEO’s vision of focusing on the company’s core strength of Ayurveda and herbal wellness has stood it in good stead. Consumer preference has been shifting towards holistic and natural health care solutions as was evidenced by the rapid growth in peers such as Patanjali and Himalaya; a trend that DABUR – despite its pedigree –was unable to capitalize on earlier. Moreover, tailwinds provided by the pandemic gave a big boost to the industry with the demand for immunity boosting products skyrocketing. DABUR’s Health Supplements/OTC products delivered a CAGR of 21%/14% over FY18-21, respectively.

Power Brand strategy – DABUR’s Power Brand strategy of focusing on nine of its major brands – that accounted for a majority (>70%) of the company’s consolidated revenue –has resulted in a faster-than-overall growth for these brands despite the pandemic. Market share gains have also been consistently impressive in these power brands. With a higher allocation of overall marketing spends, these brands not only received better visibility but also garnered more focus in terms of innovations and renovations.

Foods and beverages (F&B) - DABUR’s F&B portfolio has seen the biggest transformation in recent years in terms of offerings and growth prospects. While fruit juices and nectars still account for a majority of sales, the foray into the larger Drinks category with the launch of carbonated beverages and pet bottles has amplified DABUR’s Total Addressable Market (TAM) by over six times to INR100b. Interestingly,the company has managed to maintain itsmargins despite getting into the lower-priced drinks category. In fact,margins have actually expanded 300bp YoY in 9MFY22. The recent launches of healthy snacks and Milkshakes are also margin accretive and are witnessing growing demand from consumers. With approvals already in place for the government’s PLI scheme, management expects a further 200-300bp improvement in margins over the next five years.

Innovation has been another cornerstone of DABUR’s strategy. DABUR accelerated its innovation capabilities by rolling out relevant products in the wake of the pandemic, which were well received. Consequently, 5.6% of its total sales came from new products launched during FY21. This was higher than the ~2% contribution from new products in FY19.

Distribution – DABUR’s effort to strengthen its distribution network despite the pandemic-induced disruptions has helped improve its penetration level and rural presence. Total reach at the end of FY21 stood at 6.9m outlets. Direct reach as a proportion of total reach had increased to 18.8% in FY21 from 15.2% in FY15. Besides, the company also focused heavily on improving its rural coverage that has increased ~50% at end-Dec’21 v/s Mar’21. Rural sales growth for DABUR has remained healthy despite a slowdown in rural demand being declared by most of its Staples peers.

High growth potential stock available at attractive valuations; BUY

Along with GCPL, DABUR has the best topline growth visibility among our Staples coverage. The company has achieved a double-digit topline growth in two of the three years (since the then new CEO took over) underpinned by: a) its focus on the core segments together with its Ayurvedic roots, b) a proven Power Brand strategy, c) its vigor in innovation backed by sustained A&P spends, and d) its growing distribution reach (especially direct reach and rural coverage).

We believe DABUR can achieve even high-teens growth rate after the ongoing investment phase is complete, especially if, the current trend of market share capture sustains.

DABUR’s international business is also well diversified in terms of segments and geographies and has remained relatively resilient even during the COVID period, unlike its other peers with international operations

In each of the three major domestic segments that it operates in, the topline growth opportunity is massive. Even in F&B, where the segment appeared to have stagnated earlier, a foray into new sub-segments offers renewed prospects. In a segment with historically low margins, the recent F&B performance is encouraging and the boost from PLI benefits will further ensure that it is not margin dilutive to the overall business.

Given the high potential for topline and earnings growth, especially once the company completes its ongoing investment phase, DABUR remains one of our top two picks in the Staples space along with GCPL. The recent stock price correction of ~15% from its peak offers an attractive entry point in our opinion with the stock now trading at 39x FY24E P/E, at a discount of 15%/20% to its historical three/five-year averages, respectively. We maintain our BUY rating on the stock with a TP of INR705, valuing the company at 50x FY24E P/E

Downside risks to our investment case include: a) a persistent and intensified rural slowdown, b) a spike in material cost pressures, c) higher-than-expected moderation in the demand for herbal health products as the pandemic recedes, and d) a reversal in recent market share gains.

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