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Aggression at its best – gaining shares in an expanded opportunity

We are longstanding believers in Mohit Malhotra-led reimagining of Dabur. 2Q performance has surprised positively with 2-year revenue CAGR print of 12.9% (highest in 7+ years) and domestic volume growth of 10%. Importantly, it achieved outperformance across the portfolio. It does not matter whether Dabur is a leader or a challenger in a category, its gaining share in most of them. Furthermore, the focus seems back on the power brands after a brief deviation last year (peak of crisis) – commendable (given consensus was worried), in our opinion.

Very few companies will see permanent benefit from expanded opportunity (post last year’s events) and Dabur should be one of them. However, staying on toes and adapting to evolving needs is what is keeping Dabur ahead. To add to it, expanded opportunity in foods (beverages) is aiding a strong print. However, (1) slowdown risk in the healthcare portfolio still exists, (2) sustaining growth momentum in the beverages portfolio may be difficult and (3) there are fresh concerns on rural deceleration.

We like the (1) continued thrust on innovation, agility and culture change driven by Mohit, (2) utilising e-commerce platform to drive new product development (premiumisation), (3) distribution expansion and increased investment behind power brands to drive growth. Recent correction in stock price makes it attractive. Upgrade to BUY, TP Rs700.

* Good momentum with strongest 2-year CAGR in 7+ years: Consolidated sales / EBITDA / PAT grew 12% / 9% / 5% on the back of broad-based performance (healthcare saw a decline due to tough base though); 2-year CAGR was up 12.9% with India business growing by 11.9% (10% volume growth) and international growing at 13.8%. The strong domestic performance was driven by (1) strong performance (and recovery in parts of portfolio) in HPC (+17%) – market share gains in oral care (+13%), hair oils (+28%), shampoo (+20.5%) and Home Care (+25%), (2) strong acceleration in foods portfolio (+43%) with continued momentum from new launches and distribution expansion, and (3) good performance in healthcare segment (-5% YoY but up 19.2% on 2-year CAGR basis) – with 2-year CAGR for OTC, supplements and digestives portfolio growing 19.4%, 21.5% and 12.1%, respectively.

* Margins contraction limited by operating leverage benefit: Consolidated gross margin declined 205bps to 48.8% due to (1) inflationary headwinds in most input cost which was partially offset by pricing and (2) inferior product mix (higher contribution from beverages). EBITDA margin contraction was restricted at 61 bps to 22% on the back of operating leverage benefit (absolute spends were flat on a YoY basis) – ad-spends (-87bps) and staff costs (-106bps) were lower on a % sales basis. Management highlighted they have taken good price increases in most of the portfolio baring hair oil, which has high competitive intensity.

* Broad based performance in International business: Revenue grew 11.2% (13.8% constant currency growth), driven by good performance across most geographies – MENA (+12.8%), Egypt (+17%), SAARC (17.6%) and USA (Namaste; +16.7%); some of the territories are seeing unlock-led recovery.

* Valuation and risks: We increase our earnings estimates by 1% for FY23E; modelling revenue / EBITDA / PAT CAGR of 14 / 16 / 16 (%) over FY21-23E. Upgrade to BUY (from ADD) rating with DCF-based unchanged target price of Rs700. Key downside risk is sustained weakness in consumption demand.

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