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Best placed to ride naturals, herbal consumption trend

Dabur India (DIL) continue to report robust results with 18.1% domestic volume growth led by strong traction in health supplement, oral care, OTC & ethical businesses. The company reported 16% consolidated revenue growth with 19.5% India FMCG growth & 13% international business growth. The higher penetration led growth continued in health supplement and oral care segments with 34.7% & 28% jump in sales, respectively. DIL raised its ad spends (170 bps higher) behind core & power brands, which, in turn, benefited most new launches under core brands. New products (launched in the last three quarters) contributing 4-5% to the sales now. The company maintained its gross margins at 50.4% (31 bps higher) while employee spends sustained at corresponding quarter level. DIL was able to save 113 bps overhead spends by cost rationalisation efforts in a post pandemic period. Operating profit increased 16.5% to | 574.2 crore. The company was able to maintain its operating margins at 21% despite higher ad-spends. PAT grew 23.7% to | 493.5 crore mainly on account of higher operating profit, lower interest cost & lower tax provisioning

New launches driving growth

The company continued to aggressively launch new products across categories. It introduced Himalayan Forest Honey, Dabur Red Pulling Oil, Herb’l toothpaste variants, Premium hair Oil under Vatika & range of products in OTC & Ethical space. Moreover, within previously launched products healthcare juices, Tulsi drops, Dant Rakshak, Herb’l variants & OTC & Ethicals are getting traction. DIL has been very aggressive in new product launches in the last 10 months, which are now contributing 4-5% of sales. We believe renewed focus on health & immunity boosting products has become the driving force for the company and will also compensate for slower growth of some of the matured categories like hair care & home care. We estimate 10.8% revenue CAGR during FY20-23E.

Margins to sustain despite raw material headwinds

Though DIL is witnessing increase in raw material prices like herbs, alma & honey to the tune of 5-6%, we believe it would be able to maintain its operating margin above ~21% with various cost rationalisation measures & some tweaking in media spends. Moreover, expected strong volume growth across categories would also help it maintain margins through operating leverage. We expect ad spends at ~9% of sales in the next two years. We estimate operating margins of 21.7%, 21.9% for FY22E, FY23E respectively.

Valuation & Outlook

DIL has many new structural growth trends in its favour. Moreover, the company is continuously increasing its direct reach (targeting 1.4 million outlets by March 2021). Further, it would be able to generate sustain healthy revenue growth for the extended period by sufficiently spending on brand building. Given strong growth in high margin brands and cost cutting measures, we expect 14.4% earnings CAGR in FY20-23E. We maintain BUY recommendation with a revised target price of | 620/share (earlier | 595).

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