Dabur India (DABIND) 287

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1 Rating matrix Rating : Hold Target : 305 Target Period : 12 months Potential Upside : 6% What s changed? Target Changed from 324 to 305 EPS FY18E Changed from 7.9 to 7.5 EPS FY19E Changed from 8.5 to 8.0 Rating Changed from Buy to Hold Quarterly performance Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%) Sales EBITDA EBITDA (%) bps bps PAT Key financials Crore FY16 FY17E FY18E FY19E Net Sales 7, , , ,038.9 EBITDA 1, , , ,606.6 Net Profit 1, , , ,415.9 EPS ( ) *From FY16 onwards, financials are reported as per Ind AS Valuation summary FY16 FY17E FY18E FY19E P/E Target P/E Div. Yield Mcap/Sales RoNW (%) RoCE (%) *From FY16 onwards, financials are reported as per Ind AS Stock data Particular Amount Market Capitalization ( Crore) 50,367.6 Total Debt (FY16) ( Crore) Cash and Investments (FY16) ( Crore) EV ( Crore) 49, week H/L 320 / 259 Equity capital Crore Face value 1 Price performance 1M 3M 6M 12M Dabur (1.5) 6.4 Marico GCPL HUL Research Analyst Sanjay Manyal sanjay.manyal@icicisecurities.com Tejashwini Kumari tejashwini.kumari@icicisecurities.com Slower than expected recovery May 2, 2017 Dabur India (DABIND) 287 Dabur reported 4.7% YoY decline in consolidated net sales to 1,914.7 crore (I-direct estimate: crore). The standalone business stayed flat during the quarter but the international business witnessed 16.8% YoY decline largely on account of economic slowdown and currency devaluation in its international markets The consumer care segment declined 6.8% YoY but the food & retail segments grew 8.2% YoY and 3.2% YoY, respectively. The domestic portfolio clocked 2.4% volume growth Raw material increased 163 bps YoY as a percentage of net sales on account of higher sugar prices. To balance promotion spends, the company undertook advertisement expense cut by 136 bps to 6.4% of net sales vs. 7.8% in Q4FY16. Additionally, employee cost declined 100 bps in the quarter on account of low variable payouts. Effectively, EBITDA margin expanded 115 bps to 21.8% Other income grew 20.7% YoY to 65.0 crore. Tax outgo was 97.7 crore at 22.5% of PBT vs. 20.9% in Q4FY16. Thus, PAT for the quarter was flat at crore against estimate of crore Thrust on ayurvedic, herbal theme to be growth driver DIL has a strong portfolio of brands (Dabur Chyawanprash, Real, Hajmola, Vatika, Amla, Fem, Honey, Meswak, Dabur Red) with the focus largely on ayurvedic & healthcare offerings. The company s diverse product portfolio (hair care, oral care, skin care, home care, health supplements, digestives, OTC & ethicals) and presence in niche categories has aided revenue growth at a robust 12.4% CAGR in FY Led by DIL s brand strength in the higher growth niche segments & further strengthening of the portfolio through new launches focusing on healthcare, we estimate revenue growth at 8.3% CAGR in FY17-19E. In sweet spot to capitalise on rural recovery In the last few years (FY11-15), DIL has augmented its rural reach from ~14,000 villages to ~45,000 villages through its Project Double. The initiative played out extremely well for DIL by increasing contribution to booming rural demand in revenues to 45% from ~30% earlier. Going forward, it intends to increase its direct reach by 20% in FY18E. With the government s initiative to double the farm income and expectation of good monsoons, we expect DIL to be in a sweet spot to capitalise on a revival in rural consumption. Also, the company is increasing its urban coverage by capturing chemist network through initiative called Project CORE (~75000 stores in FY15). Post demonetisation, the company is also focusing on enhancing the direct reach and also remains optimistic on revenue growth potential through modern trade and e-commerce. Downgrade to HOLD ahead of GST We continue to believe that DIL is in a healthy position to capitalise on tailwinds generated for demand of ayurvedic & herbal products in the Indian FMCG market. We expect DIL to generate revenue and earnings growth at 8.3% and 5.2% CAGR, respectively, in FY17-19E. On account of increasing advertisement expense, we expect the operating margin to contract ~180 bps over the same period to 17.8%. We remain cautious on DIL s performance because of a) further de-stocking ahead of GST implementation and b) continued economic turmoil & currency devaluation in international market. Hence, we downgrade the stock to HOLD recommendation with a target price of 305 per share, valuing it at 38x FY19E EPS of 8.0. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q4FY17 Q4FY17E Q4FY16 YoY (%) Q3FY17 QoQ (%) Comments Net Sales 1, , , , Standalone business was flat on YoY basis (2.4% volume growth). The international business continued to remain under pressure and declined sharply by 16.8% YoY largely on account of currency devaluation and economic slowdown Operating Income NA 0.0 NA Raw Material Expenses , Increased 63 bps as percent of sales on account of higher sugar and pulp concentration cost Employee Expenses Lower variable payout led to decline in employee cost SG&A Expenses Higher promotional expense led to cut in advertisement investment Other operating Expenses EBITDA EBITDA Margin (%) bps bps Margin expanded on account of lower employee cost and adevrtisement expense Depreciation Interest Other Income PBT Tax Outgo PAT Key Metrics YoY growth (%) Volume Growth Standalone sales growth Oral care, beverages and health supplement categories clocked growth of 9%, 10% and 5% on YoY basis, respectively. However, on account of higher wholesale dependence, haircare, home care declined 4% and 6.5%, respectively Subsidiary's sales growth Adversely impacted by depreciation of currency in key markets Change in estimates FY18E FY19E ( Crore) Old New % Change Old New % Change Comments Sales Revised downwards considering pressure in both domestic and international segment EBITDA EBITDA Margin (%) bps bps Revised downwards due to increasing advertisement expense PAT EPS ( ) Assumptions FY16 FY17 FY18E FY19E FY18E FY19E Std. Sales ( crore) 5, , , , , ,848.5 Volume Growth (%) NA NA NA NA NA NA Subs. Sales ( crore) 2, , , , , ,040.1 Considering demand pressure due to geo-political turmoil and high currency depreciation in key markets RM exp. To sales % Adex to sales % Interest Cost ( crore) ICICI Securities Ltd Retail Equity Research Page 2

3 Conference call highlights Oral care clocked 9.0% YoY growth led by Red toothpaste and Meswak supported by brand investment. The company gained 100 bps market share gain in the toothpaste category The hair care category declined 4.0% mainly on account of high base (10% growth in Q4FY16). Dabur Almond oil continued to grow in double digits because of good growth in the modern trade. Brahmi Amla and Sarson Amla also witnessed encouraging growth post demonetisation. Dabur gained 30 bps market share in the category Due to the discretionary nature, the home care segment declined 6.5%. The company gained market share of 70 bps in air freshener and 100 bps in mosquito repellent creams Skin care remained flat for the quarter. To revive demand in the segment, the company is planning innovations in Oxy, Gulabari and Fem brands Led by strong demand in Chyawanprash in winters, health supplements registered growth of 5% for the quarter. Premiumisation continued in the Honey portfolio. However, sales declined marginally in the quarter. The company launched Honey Tulsi during the quarter. Though the price of raw honey is on an increasing trend, the company is in position to hold prices and push volume as it has inventory of six months of low cost honey. The digestives segment declined ~5% while OTC & ethicals also posted 4% decline. The company launched Dabur Woman Restorative Tonic in OTC category Despite intense competition, the beverages segment clocked 10% YoY growth on account of a) distribution expansion, b) occasion based advertising, c) kids proposition and d) new product launch to enter fruit drink market with brand Real JuC. Real juice gained 300 bps market share during the quarter. The company remains positive on maintaining mid 50% market share in the category The company remains cautious on the growth outlook of the international business as it expects currency depreciation to remain an overhang for the coming two or three quarters In the domestic market, it continues to maintain low inventory in the pipeline ahead of GST implementation. The company does not plan to push any inventory in the system ahead of GST. Hence, H1FY18E is expected to remain subdued Wholesale channel remains a concern post demonetisation and ahead of GST implementation. Products/categories with higher wholesale dependence continue to suffer. However, Dabur believes the wholesale channel will be back in the system. Additionally, the company is planning to increase the direct reach and also believes that modern trade and cash and carry will witness strong growth The company plans to spend aggressively on advertisements, going forward. It plans to curtail promotions and give selective trade incentives Working capital management is one key focus area for Dabur. It has successfully lowered the inventory days and debtor days The company successfully commissioned its Tezpur plant in March. The plant will be manufacturing entire range of Dabur's ayurvedic medicines, health supplements, hair oils, shampoos, toothpastes, skin care and home care products. Prima facie, it expects that with tax benefits of the plant, the company will continue to remain under MAT The company expects to report ~5-10% volume growth in FY18E on the back of aggressive advertisement, optimism on monsoon, traction of ayurvedic and herbal theme in the market ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Remain cautious; expect revenue CAGR of 8.3% over FY17-19E DIL s revenue growth has remained robust at 14.8% CAGR (FY09-16) buoyed by its diverse & niche product portfolio, a slew of product launches and synergistic inorganic acquisitions (Fem in FY09, Namaste in FY11, Hobi in FY11) both in the domestic as well as international markets. Even in a slowing consumer demand scenario from H2FY13, DIL managed to maintain its healthy revenue growth of 12-16% led by volume growth of 8-11% until Q2FY16. The slowdown, however, largely impacted the company s hair oil (segment as a whole witnessing stagnation in growth) & skin care growth (impacted by lower discretionary demand). Of late, there was intense competition in health supplements (Dabur Chyawanprash, Dabur Honey) mainly due to entry of Patanjali while keeping the oral care (Meswak & Dabur Red), home care (Odonil, Odomos), foods (Real, Real Activ), digestive (Hajmola) and OTC & ethicals portfolio growth healthy. DIL launched Project 50:50 in FY15 wherein it will focus on top 130 cities in India that contribute 50% of urban consumption to drive revenues. Further, Dabur launched Project LEAD in FY16 under which front-end teams will be separated for the healthcare & other domestic FMCG business to enable better focus on these segments. For this purpose, DIL would hire ~275 medical representatives. DIL expects annual cost of ~ crore towards Project LEAD. Dabur forayed into the ayurvedic hair oil segment with the launch of Keratex (previously a pharma product but now an OTC product) in FY15. DIL launched Dabur Honey fruit spread (four variants), carbonated fruitbased beverage Real VOLO, additional variants under Real & Real Activ fruit juices in domestic market & additional variants under Dermoviva facial fluids, body lotion, face cream & under Hazmazza in international markets in Q1FY17. Demonetisation has impacted the company largely on account of de-stocking, which continued in Q4FY17 and is expected to continue in next quarter also ahead of GST implementation. International markets continue to remain under pressure due to the currency depreciation and economic turmoil in the key markets. Hence, going ahead, we remain cautious and expect the revenue to grow at a CAGR of 8.3% in FY17-19E led by 8.3% CAGR in both domestic and international markets during the same period. Exhibit 1: Revenues ( crore) and revenue growth (%) trend FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E Sales ( crore) Sales growth (%) *From FY16 onwards, financials are reported as per Ind AS ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 2: Category wise revenue growth in percentage (YoY) FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Hair Care NA NA Oral Care NA Health Supp NA NA NA Digestives NA NA Skin Care NA NA Home Care Foods OTC & Ethicals NA Retail 19.6 NA NA NA NA NA NA NA NA NA NA NA NA NA EBITDA margin to decline with increasing advertisement expense DIL s margins have remained at higher levels of 16-18% since FY08 led by the company s strong brand equity in the healthcare space of the FMCG segment. Along with a changing sales mix (more towards the products witnessing constant demand rather than seasonal demand), Dabur has efficiently managed its raw material expenses and marketing expenses in order to sustain its margins. We expect the operating margin to decline to 18.2% and 17.8% in FY18E and FY19E, respectively on account of increasing advertisement expense as the company withdraws the aggressive promotions in the domestic market. Pressure in the international business amid currency devaluation continues to remain a concern. Exhibit 3: Revenues ( crore) and revenue growth (%) trend FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E 0 RM Cost to Sales EBITDA Margins Adex to Sales *From FY16 onwards, financials are reported as per Ind AS ICICI Securities Ltd Retail Equity Research Page 5

6 Expansion in distribution network to augur well for future DIL has efficiently expanded its distribution network in rural India through Project Double since FY11. Through Project Double, the company expanded its reach from ~14000 villages in FY11 to ~45000 villages in FY15. The extension in rural India paid off well for the company in capturing the booming rural demand in India in FY With initial signs of softening rural demand following a weak economic scenario and slow urban demand recovery, going ahead, the company limited its rural reach since FY14. Now, it plans to consolidate its position further. It plans to increase the number of SKUs in existing rural distribution centres and increase its offerings in existing rural markets along with a few new launches. Dabur plans to extend its rural reach to ~60,000 villages by FY17E. On the urban front, DIL is aiming to increase its presence in the chemist channels of distribution considering the healthcare focus of the company s portfolio. Following the target to increase chemist coverage, DIL launched Project CORE Chemist Outlet and Range Expansion in FY14. Further, the company increased its chemist distribution points from ~31,000 outlets (FY13) to ~75,000 outlets in FY15. Dabur launched Project LEAD Leveraging through Empowered Anchoring & Detailing in Q1FY16 under which front-end teams will be separated for healthcare (OTC & ethicals) and other domestic FMCG business to enable better focus on these segments. With DIL s strength of implementation, we believe the company s constant focus on managing sales and distribution efficiently in both urban and rural markets along with a strong innovation pipeline, revenue and margin growth would continue to remain stable. Post demonetisation, the company is keen in expanding its direct reach by 20% in FY18E. Ayurveda, herbal products remain ace up Dabur s sleeve Dabur, having been present in India for more than 125 years, has built its strong edifice by leveraging on ayurveda & herbal product offerings. The recent rise of Patanjali Ayurveda has been able to garner public attention towards herbal offerings & products of Ayurvedic origin. Though it has resulted in disruptive competition in many categories in which the company is present, we believe Dabur is well equipped with its array of brands with high consumer recall to counter its rivals. DIL s portfolio of traditional products, the category that has piqued consumer interest in recent times, straddles Meswak, a premium toothpaste under the herbal segment, to the recently launched Hajmola Yoodley, an ethnic beverage, to capture the fast growing segment of traditional beverages. Thus, we believe that on the back of strong brand equity enjoyed by its products, DIL is in a healthy position to capitalise on the tailwinds generated for demand of ayurvedic & herbal products in the Indian FMCG market due to the Patanjali phenomenon. The company is in the process of enhancing the emphasis on the Ayurvedic products, mainly in the overthe-counter (OTC), toothpaste, shampoo and hair oil categories. It may even come up with a different brand altogether. ICICI Securities Ltd Retail Equity Research Page 6

7 Outlook & valuation We believe DIL s strong and niche product portfolio would continue to generate stable revenue and earnings growth at 8.3% and 5.2% CAGR, respectively, in FY16-19E. However, we believe the operating margin will witness a decline at 18.2% and 17.8% in FY18E and FY19E, respectively. This is on account of increasing advertisement expense as the company withdraws the aggressive promotions in the domestic market. Pressure in the international business amid currency devaluation continues to remain a concern. We remain cautious on DIL s performance on account of a) further destocking ahead of GST implementation and b) continued economic turmoil & currency devaluation in the international market. Hence, we downgrade the stock to HOLD recommendation with a target price of 305 per share, valuing it at 38x FY19E EPS of 8.0. Exhibit 4: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY FY18E FY19E *From FY16 onwards, financials are reported as per Ind AS ICICI Securities Ltd Retail Equity Research Page 7

8 (%) ( ) Result Update Recommendation history vs. Consensus Apr-15 Jul-15 Sep-15 Nov-15 Feb-16 Apr-16 Jul-16 Sep-16 Dec-16 Feb-17 May-17 Source: Bloomberg, Company, ICICIdirect.com Research Price Idirect target Consensus Target Mean % Consensus with BUY Key events Date Event Nov-08 Acquisition of the company's largest skin care brand 'Fem' from Fem Care Pharma marking its entry in the high growth skin care segment Jul-09 Rise in stock price following the increase in FMCG Index led by attractiveness of defensives in the economic downturn Apr-10 Consistent 18-20% revenue growth with improvement in margins to ~20% tapping the revival in consumption demand Enters Turkey through acquisition of Hobi Kozmetik for 324 crore. Acquisition is in line with the company's strategy of strengthening its presence in Middle East & Jul-10 North Africa Sep-10 Dabur issues bonus in the ratio of 1:1 Acquires US based personal care firm Namaste Laboratories LLC for 451 crore. Acquisition marked Dabur's entry into US$1.5 billion hair care markets of US, Jan-11 Europe and Africa Mar-11 Launches 'Project Double' to double its direct reach in villages and to tap the growing aspirational demand of rural consumers May-12 Stock performance remaines lacklusture due to falling domestic revenues, declining margins and no significant innovations In a grim economic scenario, ability to grow in double digits (volume) along with improvement in margins and market share gains across categories made it the top May-13 preferred stock in the FMCG pack Mar-14 Launches 'Project CORE' to increase its distribution footprint in the chemist channel Jun-15 Launches 'Project LEAD' to enable better focus on healthcare (OTC & ethicals) & other domestic FMCG business Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Chowdhry Associates 31-Mar VIC Enterprises Pvt. Ltd. 31-Mar Gyan Enterprises Pvt. Ltd. 31-Mar Puran Associates Pvt. Ltd. 31-Mar Ratna Commercial Enterprises Pvt. Ltd. 31-Mar Milky Investment & Trading Co., 31-Mar Burmans Finvest Pvt. Ltd. 31-Mar M B Finmart Pvt. Ltd. 31-Mar Windy Investments Pvt. Ltd. 31-Mar First State Investments (HK) Ltd. 31-Mar Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares ARISAIG Partners (Asia) Pte. Ltd m 16.5m Matthews International Capital Management, L.L.C m m First State Investments (HK) Ltd m 10.73m Lyxor Asset Management -8.6m -2.01m BlackRock Institutional Trust Company, N.A. 3.01m 0.7m Carnegie Fonder AB -6.58m -1.59m CIMB-Principal Asset Management Bhd. 1.57m 0.38m Schroder Investment Management (Hong Kong) Ltd m -1.11m HDFC Asset Management Co., Ltd. 1.27m 0.31m Stewart Investors -4.06m -0.95m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 8

9 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Net Sales Growth (%) Raw Material Expenses 3, , , ,539.9 Employee Expenses Marketing Expenses Administrative Expenses Other expenses ,084.7 Total Operating Expenditure 6, , , ,432.3 EBITDA Growth (%) Depreciation Interest Other Income PBT 1, , , ,792.2 Others Total Tax PAT Growth (%) Adjusted EPS ( ) *From FY16 onwards, financials are reported as per Ind AS Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit before Tax 1, , , ,792.2 Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities 1, , , ,353.2 (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities , Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Sec. premium Others CF from financing activities ,035.6 Net Cash flow Opening Cash Miscellaneous adjustments Closing Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital Reserve and Surplus 3, , , ,084.6 Total Shareholders funds 4, , , ,260.8 Long Term Loans Long Term Provisions Minority Interest / Others Total Liabilities 4, , , ,722.0 Assets Gross Block 2, , , ,231.6 Less: Acc Depreciation , ,247.8 Net Block 1, , , ,983.8 Capital WIP Non- Current Investments 1, , , ,899.4 LT loans & advances Other Non-current Assets Current Assets Inventory 1, , , ,255.4 Debtors Cash & Bank ST Loans & Advances Other Current Assets 1, , , ,160.4 Current Liabilities Creditors 1, , , ,255.4 ST Borrowings Other CL Net Current Assets , ,402.0 Total Assets 4, , , ,722.0 Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) Adjusted EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) PBITDA Margin PBT / Total Operating income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 9

10 ICICIdirect.com coverage universe (FMCG) CMP M Cap EPS ( ) P/E (x) Price/Sales (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E Colgate (COLPAL) 1, Hold 24, Dabur India (DABIND) Hold 50, GSK CH (GLACON) 5,118 6,102 Buy 23, Hindustan Unilever (HINLEV) Buy 188, ITC Limited (ITC) Buy 347, Jyothy Lab (JYOLAB) Buy 6, Marico (MARLIM) Buy 35, Nestle (NESIND) 6,698 7,417 Buy 63, Tata Global Bev (TATGLO) Hold 9, VST Industries (VSTIND) 3,048 3,320 Hold 4, ICICI Securities Ltd Retail Equity Research Page 10

11 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 11

12 ANALYST CERTIFICATION We /I, Sanjay Manyal, MBA (Finance) and Tejashwini Kumari, MBA (Finance), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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