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Leveraging brand, reach to grow in new categories

About the stock: Dabur India (DIL) is one of the biggest FMCG companies with a presence in Ayurveda based products across categories. The company has a substantial market share in health supplement, OTC & Ethical products, oral care, hair care, home care & juices.

* The company has a total distribution reach of 6.9 million retail outlets with direct reach of 1.3 million outlets. It plans to increase direct distribution to 1.5 million outlets in the next two years. Dabur also derives ~50% of its sales through rural regions with a presence in 100,000 villages

Q2FY23 Results: Dabur reported 6.9% India sales growth led entirely by pricing.

* Consolidated sales were up 6.0% YoY, led by strong growth in beverages

* EBITDA was at | 600.7 crore, down 3.2% YoY, with margins at 20.1%

* Consequent adjusted PAT was down 2.9% at | 490.9 crore

What should investors do? Dabur’s share price has given 69% return in the last five years (from | 323 in October 2017 to 549 in October 2022).

* Acquisition of Badshah Masala is entry into large | 25,000 crore spices & seasoning category. DIL continues to foray in multiple foods categories to increase the addressable market for long term sustainable growth

* We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 700 ascribing 55x FY24 earnings multiple

Key triggers for future price performance:

* Though commodity inflation has impacted consumer sentiments and margins in the near term, DIL could benefit from high growth in agri economy due to increasing agri exports and, in turn, improving rural growth

* Increasing the addressable market by diversifying in fruit drinks, health foods (under real brand), baby products (under Dabur brand), extending Chyawanprash, Honey into new variants & acquisition of Badshah Masala

* Rural distribution expanded to 1 lakh villages. Increasing direct distribution reach & e-commerce presence to support under-penetrated categories

Alternate Stock Idea: We also like TCPL in our FMCG coverage.

* Strong innovation & premiumisation strategy in salt, tea, Sampann & Soulful in India market expected to drive sales & margins

* We value stock at | 950 on ascribing 55x FY24 earnings multiple.

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