CHANGE IN STANCE DABUR IN EQUITY June 13, 2017

Transcription

1 BUY CHANGE IN STANCE DABUR IN EQUITY June 13, 2017 Turning healthier Dabur was the worst performing FMCG stock YTD, up 2% vs 25% for FMCG. Our thesis that Dabur was worst hit by demonetisation given rural skew and lower market share in core categories has played out (volume fell 2.6% vs 1% growth for FMCG; 2HFY17). We turn BUYers as we believe: 1) worst of demonetisation is over; 2) new launches across categories in 2H will revive sales growth; 3) margins will improve as better category mix and margin turnaround in juices offset impact of higher A&P spend. Valuations add comfort; Dabur s 29x FY19E P/E is 2 below sector average despite comparable EPS CAGR of 18% for FY17-20E. Key risks: GST-led disruption and delay in new launches. Competitive position: MODERATE Changes to this position: NO CHANGE Demonetisation is now behind; higher rural salience could aid Dabur High rural salience that was an issue during demonetisation could become a positive. Key reasons: (i) stronger demand recovery in rural India due to high wage inflation; (ii) a good monsoon will support demand recovery in rural India; (iii) under GST, disruption in the urban wholesale channel (15% of sales) will be higher as more players enter the tax net as sales cross tax threshold. Launch of OTC pharma range could transform earnings trajectory Dabur should launch OTC Ayurveda products in 2HFY18 targeting diabetes, weight management, arthritis, cardio, stress management etc. Extensive prelaunch work has been done on product R&D, clinical trials, doctor scoping and doubling of pharmacy reach to establish credibility and access for the products. Earnings trajectory could transform given: 1) large size and rapid growth of these categories and 2) high pricing power and profitability derived from functional, need-based nature of the products. We raise FY17-20E EPS CAGR from 16% to 18% and long-term peak EBIT margin to 25% (vs 2). F&B and international businesses are potential turnaround cases Dabur s international business (32% of sales) should revive from its current slump as MENA recovers from a low base as the geo-political situation stabilizes and African expansion of Namaste takes off. Also, F&B (13% of profits) should post a margin turnaround given scale efficiencies from newly set up facilities in India and Sri Lanka for sourcing of fruit juices. Dabur s 2 discount to sector valuation appears unjustified Dabur s valuation discount to sector widened from an average of 1 in the past 5 years to 2 given recent share price weakness. Launch of OTC Ayurvedic range could transform Dabur s earnings trajectory and drive a rerating. Our DCF-based TP of `330 (`245 earlier) implies 33x FY19E P/E, in line with sector average and supported by 18% EPS CAGR over FY17-20E which is marginally ahead of estimated growth for the sector. Key financials Year to March FY15 FY16 FY17 FY18E FY19E Operating income (` mn) 78,271 84,540 77,014 88, ,942 EBITDA (` mn) 13,163 15,198 15,089 17,704 20,895 EBITDA Margin (%) 16.8% % % Adjusted PAT (` mn) 10,657 12,527 12,769 14,604 17,107 Adjusted EPS (`) RoE (%) 35.5% 33.3% 28.4% % P/E (x) Source: Company, Ambit Capital research Consumer Recommendation Mcap (bn): `498/US$7.7 6M ADV (mn): `446/US$6.9 CMP: `284 TP (12 mths): `330 Upside (%): 16% Flags Accounting: Predictability: Earnings Momentum: Catalysts Revival in sales in 2HFY18 Margin gain in F&B GREEN AMBER RED Launch of OTC & Ethicals range of products Performance (%) Jun 16 Aug 16 Oct 16 Dabur Dec 16 Feb 17 Source: Bloomberg, Ambit Capital Research Research Analysts Anuj Bansal anuj.bansal@ambit.co Dhiraj Mistry, CFA dhiraj.mistry@ambit.co Apr 17 Sensex Jun 17 Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.

2 High rural salience from bane to boon A key reason for our SELL rating was that Dabur will be hurt the most by demonetisation due to higher salience on the rural market. Our expectation that rural will be hurt more than the urban demand-supply chain has played out. Dabur reported ~2.6% volume decline in 2HFY17 vs the sector s flat revenues. However, we believe higher rural salience will turn to Dabur s advantage as: 1) demand recovery in rural India is better than in urban India; and 2) GST could disrupt the urban supply chain more than rural. Higher vulnerability to demonetisation has played out We believe Dabur s relative weaker performance during demonetisation is now behind us as availability of cash in the economy has largely stabilised. Going forward, we expect demonetisation to be a non-issue. QoQ recovery in volumes (7.4% for Dabur) also highlights the fact that the worst is behind us. Rural wholesale disruption and weaker market share have hurt Dabur Dabur derives 45% of its sales from rural India. This is the second highest after HUL which through its wide reach also has a high rural salience. Our thesis that played out during demonetisation was that high rural salience is negative because: Rural demand will be impacted more due to job losses as SMEs face existential crisis due to cash crunch and construction sector (employing~13% of India s workforce) will also face issues. Agrarian distress arising out of farmers being forced to sell their crops at low prices due to lower liquidity in the market could hurt farmers. Supply chain disruption should be higher as rural market is more indexed to wholesale channel due to limited direct reach by companies. Wholesale channel is largely dependent on cash and lack of cash during demonetisation hurt the channel s ability to operate. Exhibit 1: Dabur is next to HUL in terms of rural salience % of sales coming from Rural India Exhibit 2: Dabur s reliance on wholesale channel is low % sales dependent on wholesale HUL Dabur Britannia Colgate Marico GSK Consumer Nestle GCPL GCPL Britannia Marico Colgate Dabur HUL Nestle GSK Consumer Urban wholesale channel could be disrupted under GST As we move from demonetisation-related disruption to GST-related disruption, the channel that will now be more impacted is urban wholesale and not rural wholesale. Post GST it is expected that larger organised businesses will have to ride on to the GST Network and therefore their ability to deal in cash or to under report their earnings will get curtailed. Wholesale channel due to its traditional reliance on cash is believed to under report its earnings and thus support its earnings through tax avoidance. It is generally believed that retailers and rural wholesalers, by virtue of their throughput being lower than minimum threshold beyond which filing returns under GST, are likely to remain out of GST s purview. This is likely to allow them to run their businesses without disruption. However, urban wholesalers by virtue of their large turnover are likely to be a part of GSTN which could cause disruption to their business model and impact their profitability if their ability to avoid taxes is hurt. This could disrupt urban wholesale channel in near term. Dabur s over indexation to rural India will also help it in this case as it is relatively under indexed to urban wholesale. June 13, 2017 Ambit Capital Pvt. Ltd. Page 2

3 Rural growth could outpace urban growth We believe rural India could potentially grow faster than urban India especially if the predictions of normal monsoons play out. The 4QFY17 results commentary by Dabur and several other FMCG companies suggested that the recovery in rural India post demonetisation has been stronger and in some instances rural India is growing faster than urban India. Going forward, we believe this trend could accelerate as: 1) rural wage inflation is rising; 2) healthy growth in agri in 4QFY17 suggests farmer distress could be on the wane; and 3) a slew of government initiatives like DBT, Skill India, APMC reforms could aid rural growth. Rural wage inflation has been strong Historically there has been a healthy correlation between rural wage inflation and volume growth for the FMCG companies. Reason being, rural India has significantly lower penetration rates and usage rates vs urban India. Therefore, any rise in income goes towards more people using FMCG products or existing users using them more frequently. We observe rural wage inflation is on the rise and is currently running at a multi-year high. We expect this trend to be supportive of volume growth recovery in rural India and benefit Dabur. Exhibit 3: High correlation between rural wage inflation and FMCG volume growth with a year s lag Exhibit 4: Rural wage inflation has been rising sharply and is at a multi-year high 25% 2 15% 1 8% 6% YoY change in all India rural average wage 5% 4% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 2% Rural Wage inflation FMCG Volume growth Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Job creation focus is on the bottom end; white collar jobs under pressure Latest naukri.com jobs index reflects that news flow around job stress in IT and the BFSI sector has started to play out and the impact on urban white collar job creation is visible. However, we believe programmes like Skill India and Make in India that promote manufacturing can potentially create a large pool of skilled blue collared workers and provide them with jobs. The beneficiaries are likely to be rural migrant workers. Under Make in India programme, the Government plans to create 100mn jobs till 2022; Under Skill India, the Government plans to train 400mn people by 2022 Exhibit 5: Naukri.com jobs index is tapering with April showing an 11% dip 5 Naukri jobs index (YoY) Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 June 13, 2017 Ambit Capital Pvt. Ltd. Page 3

4 DBT, APMC reforms imply more money in rural consumer s pocket The Government of India has taken several steps around improving rural India s economic prosperity and ensuring their spending power goes up. These initiatives in our view should pull out millions of Indians from poverty into consuming class. Also, it should aid the existing consuming class to either use products more frequently or upgrade to higher-end products. This should lead to both volume growth as well as value growth through premiumisation. Some of these programmes are given below. Exhibit 6: Some of the Government s schemes that we believe are going to aid rural consumption Scheme Comments Progress Target DBT APMC reforms Crop Insurance Soil Health Cards Swacch Bharat Mission Rural Electrification Direct payout of subsidies cuts out middle man leading to more money in the hands of poor Higher payout to farmers for their produce by cutting out middle men Greater financial security to farmers preventing them from falling into debt trap if natural calamities occur Improve yields of the land and encourage right crops are grown to improve farmer s income With increased sanitation, health remains better which cuts down spending on treatments Overall well-being is improved and entertainment options like TV and digital viewing improvement provides brands to create awareness through advertising Strong monsoons as predicted could provide a further fillip Saving of `500bn in last 3 years; 84 schemes in 17 ministries are covered under the DBT Under the new model law, traders will be able to transact in all markets within a state by paying a single fee and sell perishables such as fruits and vegetables outside existing mandis (wholesale markets) The scheme plans to cover 5 of the farmers in the next 2-3 years. As of now, insurance companies are being selected for implementation of this scheme As of March 2017, a little over 55mn cards have been issued, around 4 (of 140mn farmers) As of 27 October 2016, 56 districts in India were open defecation free (ODF) Government claims it has electrified 10,398 villages till 2016 The 4Q GDP print highlights strong growth in agriculture. The Indian Meteorological Department (IMD) and SkyMet both predicted a normal monsoon this year. Effect of El Nino does not appear to be strong enough yet to hurt the advance of monsoons. July is the most crucial monsoon month as that is when bulk of sowing happens. Even last year, when monsoons were good, we had witnessed a healthy growth in agri and company commentaries suggest that the month of October (festive season and harvest season) had witnessed double-digit volume growth before demonetisation pulled back the growth. We believe a strong monsoon leading to healthy growth in agri will revive volume growth to double digit with added support of low base taking it up even further. Exhibit 7: Historical correlation between monsoon, agricultural growth and FMCG volume growth has been high % 2 15% 1 5% Dabur The savings figure is expected to significantly rise in the next financial year as the Government will be bringing a total of 533 central payout schemes in 64 ministries under the DBT mechanism by March 31, 2018 This scheme is dedicated to bring in more than 5 of the farmers under its wing within the next 2 3 years It envisages a uniform premium of only 2% to be paid by farmers for Kharif crops, and 1.5% for Rabi crops. The premium for annual commercial and horticultural crops will be 5% The Union Budget for had allocated ~`3.7bn. In FY18, mini labs will be set up in all 648 Krishi Vigyan Kendras. And, to fund the setting up of 1,000 mini labs by qualified local entrepreneurs a credit-linked subsidy will be given Government is aiming to achieve an ODF India by 2 October 2019 by constructing 12 million toilets in rural India, at a projected cost of `1.96trn Ensuring 24 hours of electricity to all of the country by the year 2019 Correlation of Monsoon with FMCG volume swing is high at 69%. Correlation of Agricultural growth and FMCG volume growth is a little lower at 56-2 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Monsoon Surplus/ Deficit Agri GDP growth (RHS) FMCG Volume growth (RHS) June 13, 2017 Ambit Capital Pvt. Ltd. Page 4

5 OTC Pharma could improve Dabur s earnings trajectory Dabur has been in the process of creating and launching a product portfolio in the OTC Pharma category for chronic ailments like diabetes, cardio vascular (CVS), weight management, arthritis and women s health. We believe Dabur s choice of ailments, product development, branding and route to market strategy should make these launches successful. As Dabur succeeds in scaling up this initiative, it could transform the trajectory of both the topline as well as profitability. OTC Pharma An idea whose time has come While Dabur has been working on this portfolio for more than 5 years, we believe this delay could actually be beneficial as the pick-up in acceptance for Ayurveda due to popularity of Patanjali could help. Rising income levels, sedentary/urban lifestyles and rising health awareness will drive growth With rising income levels and awareness towards healthier lifestyle going up, focus is now shifting towards managing and preventing ailments rather than curing them. Ayurvedic products have a perceived/actual edge in case of treating chronic diseases as they are perceived/actually have lower side effects vs allopathic medicines over longer term use. Also, with the Government focusing on alternative medicines through AYUSH (Ayurveda, Yoga and Naturopathy, Unani, Siddha and Homoeopathy), there is renewed legitimacy around non-allopathic medication. Popularity is also rising for Yoga and its proponents like Baba Ramdev who has led his FMCG company, Patanjali, to over `100bn within 5 years. We believe the environment is right for companies like Dabur to successfully launch new OTC Pharma products which are based on Ayruveda and are focused on such chronic ailments. Exhibit 8: Government is encouraging non-allopathic medication through AYUSH initiatives To Enhance Required Awareness Credibility/ Efficacy Access Budget Trained practitioners Government recognition Dispensaries/ Hospitals Pharmacies Drugs Steps Taken Ayush ministry has been allocated `14.3bn for the financial year Setting up of new State Government Ayush Educational Institutions UGC has asked universities to start PhD programmes under Ayush disciplines Co-location of Ayush facilities at Primary Health Centres (PHCs), Community Health Centres (CHCs) and District Hospitals (DHs) Upgradation of exclusive State Government Ayush Hospitals and Dispensaries Strengthening of State Government/ PSU Pharmacies and Drug Testing Laboratories (DTL) Cultivation and Promotion of Medicinal Plants ; Exhibit 9: Strong growth of Patanjali indicates rapidly rising acceptance of Ayurveda 120, ,000 80,000 60,000 40,000 20,000 - Revenue (` mn) FY12 FY13 FY14 FY15 FY16 FY17 Category sizes are large; fragmented market share not a concern India is considered the world capital when it comes to chronic lifestyle ailments like Diabetes, CVS and Arthritis due to Vitamin D deficiency. Obesity levels are also on the rise. We believe the size of these categories is therefore large and given chronic nature of the diseases, users have to use the medication throughout their lives once they catch the ailment. June 13, 2017 Ambit Capital Pvt. Ltd. Page 5

6 Size of the category is large: Currently, the size of Diabetes, CVS, Vitamins (for arthritis) and stress/anti-depression medication is `97bn, `136n, `96bn and `67bn respectively in India. These are growing at a CAGR of Even if we assume Ayurvedic medication reaches 1 of allopathic medicines (in China Traditional Chinese Medicines are 3 of total medicinal spends), the category size is large (`40bn+) and attractive for players like Dabur to enter. Growth rates can be strong: Despite category sizes being already so large, it is estimated that only a fraction of patients are actually diagnosed and are under medication for these ailments. As affordability and access to medical services keep rising, more patients will get diagnosed and be brought under medication. Also, in urban India the age at which patients are catching these ailments is falling, which is leading to a faster growth in patient addition. Exhibit 10: India is world s capital for chronic lifestyle diseases Estimated market size Last 4-year growth Disease (` mn) CAGR % of population affected Anti-Diabetic 96,986 19% 5% Cardiac 136,345 12% 2% Vitamins / Minerals / Nutrients 95, % Neuro / CNS 66,698 11% 1% Globally, key issue that OTC Pharma categories face is fragmented market share. However, in India, Ayurvedic products tend to be market leaders in this space with healthy market shares. Lack of requirement for approvals, easier product development, distribution synergies with prescription drugs and high profitability despite branding costs make it attractive for all Pharma companies to have their own OTC portfolio. However, in case of Ayurvedic OTC products this is relatively a smaller issue given dearth of serious players with genuine right to win. Patanjali and Himalaya are the two established incumbents with Dabur and Emami making attempts to enter this space. Exhibit 11: World OTC market is fragmented with no clear market leadership Exhibit 12: Indian OTC has lower fragmentation and is dominated by Natural/Ayurvedic companies Market Share in world OTC Market share (%) 4% 3% 2% 1% J&J Bayer GSK Pfizer Sanofi Herbalife Amway RB P&G NBTY Emami GSK Consumer Analgesics Sun Pharma Dabur Abbott India Digestives GSK Asia Profitability and brand loyalty in functional, need-based categories are high Besides providing large category size and high growth rates, these products also tend to have higher profitability. Being functional (providing tangible relief) and needbased (providing cure) in nature, these products tend to have healthy pricing power which allows gross margins to be high. Despite large part of this GM being invested back for brand building, the OPM tends to remain high (in the range of ~3) which is significantly better than Home and Personal Care (HPC) category which tend to have profit margins of ~2. June 13, 2017 Ambit Capital Pvt. Ltd. Page 6

7 Exhibit 13: Average operating margin for global HPC companies is at ~2 Exhibit 14: Average operating margin for global OTC Pharma divisions is ~28% Operating margin Operating margin 3 35% 25% % 1 5% 25% 2 15% 1 5% Unilever PG Colgate Nestle RB Bayer PG RB Dabur has right to win in this segment We believe Dabur has the right to succeed in OTC Pharma due to its heritage, its brand s association with herbal/natural products and right launch strategy, wellresearched products with supportive clinical trial data, scoping of allopathic doctors and calibrated product/geographic spread. Exhibit 15: Summary of Ayurveda players in India Company Since Revenue (` bn) Last 5-year revenue CAGR Distribution reach (mn stores) Dabur % 5.8 Emami % 4.3 Patanjali % 1.0 Himalaya 1930 ~25.0 ~2 0.6 Exhibit 16: Players active in Ayurvedic OTC Pharma space Credibility Branding Distribution Doctor Connect Price Points Dabur Patanjali Himalaya Emami Comments Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak Patanjali enjoys higher credibility due to Baba Ramdev s image Due to more than 100 years of existence in Ayurvedic field, Dabur enjoys higher brand power with Patanjali being close second Dabur s total reach of 5.8mn outlets scores higher than its peers Dabur scores higher in Doctor advocacy versus its peers. Patanjali s doctor outreach is limited to only Ayurvedic doctors and does not extend to allopathic doctors Patanjali products are ~20-3 cheaper than Dabur and Emami leading to low score for Dabur Branding and distribution strengths should help where others failed Dabur by virtue of its 130 years of presence in India with undiluted positioning of being Ayurvedic/herbal/natural products-based company gives it the necessary credibility to enter OTC Pharma category. Also, unlike its peers like Himalaya which had an umbrella brand strategy that did not allow specific products to get identified with their functions/needs/therapies, Dabur plans to brand each product separately clearly brining out its association with a particular ailment. This would help popularise and scale up each product in its own right. Also, Dabur by virtue of a wider product portfolio has a distribution reach unmatched by any of its peers. It has also embarked on a mission to double its pharmacies reach through Project Core. This has enabled it to establish direct reach with over 212,000 pharmacies (out of 850,000 nationally). This should provide it an edge over its peers. June 13, 2017 Ambit Capital Pvt. Ltd. Page 7

8 Exhibit 17: Dabur s distribution reach is superior to peers Outlet reach (mn stores) HUL Dabur Colgate Marico Emami Patanjali Himalaya Dabur has been building the product portfolio over the past 5 years Given the cost of failure is high and each failed launch can set back re-launch attempts by many years, Dabur has been meticulous in its launch process for OTC Pharma category. It has spent more than 5 years in developing product formulations in-house (with exception for Diabetes product Madhurakshak which has been inlicenced), getting them patented and collecting their efficacy data through clinical trials. The products it has created and has been testing during this period are discussed below. The best route to market strategy among peers We believe Dabur can succeed where Himalaya and Emami have failed to make an impact. In case of Himalaya, we believe lack of scoping of allopathic doctors and an umbrella branding strategy which did not allow its products to be associated with particular functions/needs/ailments has hurt its potential to scale up. In case of Emami, we believe launch of a wide array of products without requisite allopathic doctor support and weak direct distribution in launch markets in South India led to less than desirable success rate. Dabur on the other hand has been careful in launching and scaling up few products to begin with. It has been careful in limiting the geographies to only two states (Maharashtra and UP) and has put in the efforts and investments to scope over 10,000 allopathic doctors in these two states using clinical trial data. This has resulted in Dabur learning from any potential mistakes and getting the confidence for a successful national launch for some of its products. As compared to Patanjali, Dabur probably lacks branding capability but benefits from wider distribution and more mainstream acceptability of its products as it appeals to allopathic medication patients as well, whereas in case of Patanjali patients with exclusive faith on Ayurveda form a larger base. June 13, 2017 Ambit Capital Pvt. Ltd. Page 8

9 Exhibit 18: List of products launched for cholesterol management, stress management and diabetes A case of counting chickens before they are hatched? We realise that while the case for Dabur s entry into OTC Pharma category and its potential to transform Dabur s earnings trajectory is high, there are certain risks associated with the launch which could make it less impactful vs our expectations. Launches have been in the pipeline for long and have been delayed: While we appreciate that Dabur has chosen a robust new launch process to ensure haste does not lead to failure, we do feel the launch cycle has taken much longer than initially anticipated. Even going forward the process that is likely to be followed will be a long drawn affair with selective products being launched across selective geographically over a period of time. This could mean despite success, contribution of these launches could be small to overall topline growth and profitability of the company. Immediate benefits and efficacy are not visible to consumers: Dabur s existing Health Supplements and Digestives portfolio has products like Pudin Hara, Hajmola and Honitus which provide tangible, visible and fairly immediate relief to consumers. Such products tend to grow faster and enjoy better brand loyalty which gives them higher pricing power/profitability as their efficacy is well recognised by the consumer. However, the OTC Pharma range being launched is for long-term consumption for treating chronic diseases and their benefit to the consumer is unlikely to be visible in the near term. This could delay the adoption rate and could also lead to high dropout rate for these products with the consumers. Profitability implications are yet unknown: We believe GM for these products would be in the range of 70-8 vs Dabur s overall GM of ~5. However, these could run at sub-optimal scale and require high investments on branding, distribution and doctor scoping for a prolonged period of time. This could limit their positive contribution towards lifting up Dabur s overall margin trajectory and could initially be a drag on Dabur s profitability. June 13, 2017 Ambit Capital Pvt. Ltd. Page 9

10 F&B, International set for a turnaround The two key businesses that have been under pressure are F&B (12% of consolidated sales) and International (32% of sales). In case of fruit juices, disruption in supply chain in Nepal and subsequent setting up of alternate facilities in India and Sri Lanka were the key reasons for decline in EBIT margin (down from 16.1% to 13.8% over FY16-17). In the International business, problems have been two-pronged: 1) sharp decline in MENA due to geopolitical issues and economic slowdown due to crude decline; and 2) inorganically acquired businesses of Hobi and Namaste performing below expectations. We believe both these business units will turn around with a rise in profitability in juices and revival of growth in International. Dabur on top of our international strategy framework As per our detailed analysis of the international businesses of Indian FMCG companies (19 April 2017) on parameters like geographical split, product/brand portfolio, route to market, and organic vs inorganic strategy, Dabur scores the highest. We believe higher contribution from South Asia and MENA, a large organically developed product/brand portfolio, strong local branding and supply chain, and a slowdown in M&A activity are key positives for Dabur. Exhibit 19: Dabur s international business scores highest in Indian FMCG % of Business Geographical Resource Financial Company international integration spread allocation transparency sales ability GCPL 45% Marico 22% Dabur 32% Overall, Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak Geographical mix with focus on S Asia and MENA is favourable Dabur derives 33% of its international sales from MENA region, which has grown at 15% CAGR over FY Also, it derives 28% of international sales from South Asia, which has also grown strongly at 26% CAGR over FY We believe this is a healthy geographical mix as we prefer these two markets over the rest of the world for Indian FMCG companies to expand. This is because they have the right to win in these markets. Large Indian diaspora, cultural similarity with local population, strong growth potential and largely stable FX regimes are the key positives. This compares favorably with Western countries where FX and geopolitical risks are lower but so is growth potential and acceptability of Indian FMCG products. In Africa, growth potential is higher but the negatives are geopolitical and FX risks. South-east Asia has lower geopolitical and FX risks with moderate growth potential but lower acceptability for Indian FMCG products. Exhibit 20: MENA and S Asia are better geographies for Indian FMCG players vs the rest of the world Product and Ease of doing Growth Geopolitical brand Overall Comments business potential risk acceptability While there is growth opportunity, there are equally high geopolitical and forex or repatriation risks. The ease of Africa/LatAm doing business is particularly poor in Sub-Saharan Africa. There is high product and brand acceptability due to the Middle East Indian diaspora and high ease of doing business; however, the geopolitical risks are a concern. There is very low acceptability of Indian products and South-East Asia brands; ease of doing business and low geopolitical risks Indian Subcontinent (ex-india) Developed Market, Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak make this a favourable geography to enter. Very high cultural similarities to India and growth potential make this one of the most conducive geographies to grow There is high competitive intensity from well-entrenched brands and low-growth potential in these markets. June 13, 2017 Ambit Capital Pvt. Ltd. Page 10

11 Moderation in acquisitions post learning from prior deals is a positive Dabur has made two major acquisitions internationally Hobi (2010) in Turkey and Namaste (2010) in the US for catering to Africa. Hobi was acquired for high growth potential in Turkey and access to product portfolio which could be cross-pollinated into Dabur s other international markets. Namaste was acquired as it was catering to the African American community in the US and was expected to find wide acceptability in Africa at the right price point. However, both acquisitions have underperformed expectations as explained below: Hobi: Business has grown at 16% CAGR in INR terms over FY However, high cost inflation and transactional impact of FX depreciation kept profitability low. Also, in recent years, rising social unrest and geopolitical instability due to war in the neighboring areas caused a slowdown in the economy, resulting in weaker revenue growth. Namaste: The key growth driver for Namaste was expected to come from African markets. Dabur had planned to set up local manufacturing and supply chain in Africa to bring down costs and make Namaste products affordable. Acceptability of products was not an issue due to popularity among the African American community in the US. However, Dabur struggled to acquire land and get timely approvals to set up local operations. The erstwhile management of Namaste also left before time, leading to disruption. Namaste has not grown over FY Exhibit 21: Financial snapshot of Dabur s international subsidiaries ` mn FY12 FY13 FY14 FY15 FY16 CAGR Hobi Revenue 1,326 1,884 2,256 2,527 2,423 16% EBITDA 17 (5) (7) Margin 1.3% -0.2% -0.3% 2.6% 2.8% Namaste Revenue 5,483 4,905 5,798 4,524 5,581 EBITDA Margin 15.2% 7.7% 3.1% 0.2% 1.9% We appreciate the fact that Dabur has learnt from its experiences and has gone slow in acquiring businesses internationally. Also, the way these businesses are structured is that their debt servicing is to be done by these businesses themselves with no liability or obligation on Dabur India or any other Dabur business unit to service this debt. This is a prudent capital allocation strategy, in our view. We see a turnaround soon Dabur s international business revenue declined by 5% in FY16-17 vs the last 5 years CAGR of 25%. Key reasons for this are: 1) significant slowdown in MENA due to geopolitical and economic weakness; 2) FX depreciation in Africa and Turkey; and 3) the underperformance of Namaste. With MENA likely to revive from a low base and Namaste shifting manufacturing to Africa, we expect overall growth in the International business to hit 13% CAGR over FY17-20E vs 1 over FY MENA remains core to international business: We believe with crude prices stabilizing and market size having corrected significantly (down 3 over FY16-17), MENA should see a revival in growth on a low base. Dabur remains focused on the geography with continued investment in local product development, manufacturing, branding and distribution with Vatika and Dermoviva as the key brands. Namaste should see revival in growth as Africa facilities ramp up: In the case of Namaste, Dabur has been able to set up and operationalize production facilities in Africa. This should allow it to finally launch the Namaste portfolio in African markets in a meaningful manner and realize higher growth rates (1+) hereon. Over the last year, Dabur has acquired four small cosmetics and personal care firms in South Africa (Discaria Trading, CTL Group, D&A Cosmetics, Atlanta Body & Health) for a total consideration of `350mn. They should provide route to market and manufacturing footprint for Namaste. June 13, 2017 Ambit Capital Pvt. Ltd. Page 11

12 FX risks remain high but spillover effect is ring-fenced: FX risks in Africa and Turkey remain high and Dabur will continue to face translational impact on its earnings from these geographies. However, Dabur has carefully structured its International and Domestic businesses in such a manner that investments and debt servicing are a legal responsibility of the local subsidiaries and Dabur overall does not get impacted if FX declines. Exhibit 22: Growth trajectory of the international business set to revive International business revenue (Rs mn) Growth (RHS) 40, , , , FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Juices will lead the F&B thrust Beside OTC Pharma, the other key category of focus for Dabur is F&B, with juices being the key driver within the overall category. Dabur has planned a series of new launches (some of which like tender coconut water are already ramping up fast) including entering the much larger fruit drinks category through a brand called Juicy. Also, as supplies for juices from facilities in India and Sri Lanka ramp up, these should achieve optimal scale and aid a revival in profitability to erstwhile midteen levels. We prefer F&B categories over HPC We are encouraged by Dabur focusing on F&B category as believe F&B should grow significantly faster than Home and Personal Care (HPC) categories. This will be led by low penetration rates, large share of unorganized segment and changing consumer behavior that prefers convenience, impulse purchases and health benefits. Dabur has done well in a tough category like fruit drinks, where it has managed to grow market share and retain #1 position despite the presence of strong international and local competitors like Pepsi (Tropicana) and ITC (B Natural). Exhibit 23: Dabur has maintained a healthy market share in Fruit Drinks 10 Coca Cola Pepsi Dabur Others % 4 36% 36% 4 13% 14% 15% 16% 15% 14% 23% 24% 24% 26% 27% 24% 24% 23% 22% 22% 23% 22% June 13, 2017 Ambit Capital Pvt. Ltd. Page 12

13 Profitability should return to prior levels The ramp-up in the profitability in fruit juices was hit by disruption in the supply chain in Nepal due to social and political unrest. It is to Dabur s credit that in a short period of time it was able to set up alternate sourcing from India and Sri Lanka. However, sub-optimal scale of operations at these facilities hurt the profitability of the segment. As volumes of juices continue to grow and stability returns to Nepal, we expect these facilities to post a rise in profitability. Exhibit 24: Steady recovery in profit margins for Dabur in fruit Juices 20,000 Juices and Food revenue (Rs mn) EBIT margin (RHS) , , , FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E 12. New launches across the spectrum should sustain strong topline growth We expect fruit juices and drinks to be the key drivers of growth revival led by new launches. Dabur has already successfully launched a tender coconut water product. It also continues to expand and refresh its offerings under its umbrella brand, Real. Plans are also in place to enter the much larger fruit drinks segment through a brand called Juicy. In our view, this is an attractive segment due to 3x the size and potentially higher profitability given much lower fruit and pulp content. Also, volatility in margins is likely to be lower in the case of fruit drinks than fruit juices which are often hurt by swing in fruit pulp prices and limited scope for alteration in formulations given the need to preserve purity of content. Fruit Juices are defined as Juices with more than 24% fruit/pulp content whereas Fruit drinks are pre-dominantly sugar and flavor based drinks with less than 24% juice content. Dabur has been present in Fruit Juices which is a smaller, faster growing category and carries strong health related positioning. Exhibit 25: Fruit Juices are growing faster than Fruit drinks but on a lower base (Juices are 1/3 rd of drinks) Exhibit 26: Dabur s value market share in Juices has increased over 2012 to 2016 despite competition from ITC 26% 24% Volume growth CAGR over Dabur Real Others Pepsico Tropicana ITC - B-Natural 7% 8% 38% 28% 22% % 57% 2 Juice Drinks 10 Juices June 13, 2017 Ambit Capital Pvt. Ltd. Page 13

14 Earnings to rebound strongly We expect a healthy rebound in Dabur s earnings growth trajectory led by strong topline growth with flat-lining of margins. We expect near-term disruptions from demonetisation and GST to subside by 2HFY18. Also, new product launches are expected to pick up and the international segment is expected to revive. Profitability should be maintained as higher investments in A&P are likely to be funded by increased profitability from juices and potential benefits from GST rates. We are building in an EPS CAGR of 18% over FY17-20E vs 15% over FY Low base and new launches to drive sales We expect sales growth to pick up from the low levels of FY17 (2% YoY decline) to a healthy 16% CAGR over FY17-20E as near-term headwinds of demonetisation and GST give way to structural growth drivers of new product launches and recovery in rural consumer demand. Strong topline growth from 2HFY18 We are building in over 2 topline growth in 2HFY18 given the potential confluence of these factors: 1) re-stocking as GST-related disruptions settle; 2) low base as last year was impacted by demonetisation; 3) revival in new product launches; and 4) strong rural demand from continued rural wage inflation and possibly good monsoons. We expect this sales momentum to carry forward into FY19-20 as well, especially as the International business revives too. We are building an overall sales CAGR of 16% for FY Exhibit 27: Sales trajectory for Dabur is expected to pick up from 2HFY18 Revenue (Rs mn) Growth (RHS) 140, , ,000 80, ,000-2 FY14 FY15 FY16 FY17 FY18E FY19E FY20E New launches could again contribute over 3 to growth Traditionally, new product launches (variants/brands/products/skus launched over the last 3 years) have contributed almost a third of growth for Dabur. However, over the last 2-3 years, this pace has slowed as new launches slowed due to delay in launch of the OTC Pharma portfolio and the Uveda range of premium skin care. With OTC Pharma now on the verge of launch and expectations of a healthy new product pipeline in F&B and skin care, we expect new launches to again contribute at least a third of growth for Dabur. June 13, 2017 Ambit Capital Pvt. Ltd. Page 14

15 Exhibit 28: New product launches had slowed for Dabur in recent years Time Segment Product FY12 Juices Real Burrst: Ethnic Flavour Kokam Skin Care Gulabari: Moisturizing Lotion Juices Activ: Drinking Yoghurt Skin Care Fem: Turmeric Variant Home care Odonil Gels FY13 OTC & Ethicals Ratnaprash Hair Care Vatika Enriched Coconut Hair Oil with Hibiscus Juices Milk Shakes test marketed Juices Supa Fruits range Skin Care OxyLife for Men Bleach Digestive Hajmola: Anardana Variant Skin Care OxyLife: Gel Bleach FY14 Hair Care Keratex Hair Oil Skin Care Dabur Baby Massage Oil Digestive Hajmola Chatpat Home care Odomos Roll On FY15 OTC & Ethicals Chocolate Chyawanprash & Ratnaprash OTC & Ethicals Liver Protection& Functioning Hair Care Anmol Jasmine Juices Coconut Water FY16 OTC & Ethicals Ratnaprash Sugarfree Skin Care Fem Diamond Bleach Skin Care Gulabari Facewash Home care Sanifresh Germguard International business should revive sooner than later International business contributes 32% to Dabur s sales. We expect the growth rate to revive to 13% over FY17-20E from 8% over FY Bulk of this growth should be led by a revival in MENA (33% of international business) and acceleration in growth in Africa led by Namaste (21% of international sales). Exhibit 29: MENA and Africa contribute 33% and 22% to International business revenue Dabur Exhibit 30: Hobi and Namaste contribute 9% and 21% to Dabur s International business revenue Contribution to International business Asia, 28% Africa, 22% Hobi, 9% Namaste, 21% America, 17% Middle East, 33% Others, 7 June 13, 2017 Ambit Capital Pvt. Ltd. Page 15

16 Margin boost potential from F&B turnaround We expect Dabur to largely maintain its profit margins as any gains from GST or revival in margins of F&B are likely to be reinvested in A&P for supporting new launches. However, as the OTC Pharma portfolio scales up, we expect a structural improvement in the margin trajectory in the longer run. For FY17-20E, we build in a moderate 110bps margin gain. Exhibit 31: GM trajectory likely to be better than the OPM trajectory Gross margin EBITDA margin (RHS) 57% 21% 54% 19% 51% 48% 17% 45% 15% FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E ; Since FY17 gross margin and EBITDA margin are on Ind AS, hence historical numbers are not comparable Profitability in juices should revive as new facilities scale up F&B contributes 12% of sales and ~13% of profits for Dabur. A healthy recovery in margins for fruit juices could be a key driver for overall profitability improvement. GST is a black box could surprise on the upside While GST is expected to be beneficial for Dabur overall, the actual impact is not yet known as the extent of Input Cost Credits is not yet known. Also, with Dabur s new Guwahati facility coming on stream, there should be benefit on the taxation front as Dabur should be able to get refund for its State GST component. Though any large benefit (as in case of oral care) is expected to be passed on to consumers, we believe Dabur should still benefit from either margin gains if some tax benefits are retained or higher volume growth if it is able to take meaningful price cuts. Exhibit 32: Dabur should be a net beneficiary of GST rates Category % of Sales Old Tax Rate New Tax Rate Health Supplements 18% 11% 12% Digestives 6% 11% 12% OTC & Ethicals 9% 11% 12% Home Care 6% 22-23% 28% Hair Care 23% 22-23% 23% Skin Care 5% 22-23% 28% Oral Care 15% 22-23% 14% Foods/ Juices 12% 12% 12% Others 6% 22-23% 18-28% Total 18% 17% Higher A&P spends around new launches are a key risk We expect the recent cut in A&P spends to be short-lived as Dabur embarks on a more aggressive new launch cycle. We expect A&P spends as a percentage of sales to pick up by 60bps over FY17-20E. But this could be funded by a rise in GM and operating leverage in other expenses like employee costs, overhead expenses and logistic costs. June 13, 2017 Ambit Capital Pvt. Ltd. Page 16

17 Exhibit 33: A&P spend could rise Exhibit 34: but other expenses should make up for it A&P as % of sales 12% 17% 1 14% 11% 8% 6% 4% 8% 2% 5% FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Employee Cost Freight Overheads ; FY17 onwards numbers are based on Ind AS and hence prior numbers are not comparable ; FY17 onwards numbers are based on Ind AS and hence prior numbers are not comparable Summary of financial estimates Exhibit 35: Key assumptions and estimates (` mn) Profit and loss FY16 FY17 FY18E FY19E FY20E Comments Domestic revenues 55,283 54,812 63,579 75,349 89,253 Expect domestic revenue growth of 18% CAGR over Growth (%) 0.2% -0.9% % 18.5% FY17-20E led by fruit juices, Oral care and OTC International revenues 23,224 21,989 24,716 27,335 31,749 Growth (%) 1.4% -5.3% 12.4% 10.6% 16.1% Total revenues 78,507 76,801 88, , ,002 Growth (%) 0.6% -2.2% % 17.8% Gross Profit 46,570 38,582 44,882 52,601 62,459 Gross margin (%) 55.1% 50.1% 50.7% 51.1% 51.5% Employee cost (% of sale) 9.4% 10.3% 10.2% 10.1% 10. Advertising (% of sale) 14.7% 8.4% 8.6% 8.9% 9. Expect strong revenue growth of 16% and 15% CAGR in Asia and the Middle East over FY17-20E on recovery from a low base Expect marginal increase in gross margins as F&B margins recover and on increased contribution from of higher margin OTC business Expect operational efficiencies to lead to minor benefits in employee costs Increasing new product launch activity to lead to higher advertisement spends Freight & forwarding (% of sale) 2.1% 2.1% 2.1% 2.1% 2.1% Expect freight expenses to remain stable Other expenses (% of sale) 10.9% 9.8% 9.8% 9.7% 9.7% Expect other expenses to remain stable EBITDA 15,198 15,089 17,704 20,895 25,103 Above changes should lead to margins EBITDA Margin % % 20.7% improvement in EBITDA margins over FY17-20E Tax rate 19.4% 20.5% Tax rates to increase marginally over FY17-20 Net Profit margin 14.8% 16.6% 16.5% 16.6% 17.1% Balance Sheet Lower interest costs and slower increase in depreciation to help boost net profit margin Capex 2,393 2,934 2,000 2,000 2,000 No material capex requirements for FY17-20 Capital Work in Progress Working Capital days Marginal improvement in working capital cycle due to inventory and creditor management Debtor days Expect Debtors days to remain stable Current Liabilities days Expect current liabilities days to remain stable Inventory days Expect Inventory days to remain stable Net debt/(cash) to equity (0.5) (0.6) (0.6) (0.7) (0.7) Dabur is now a net cash business Cash flows (` mn) Operating cash flows 12,450 14,273 17,400 18,558 22,230 Expect free cash flows to grow strongly over FY17- Free cash flows 10,439 11,366 15,400 16,558 20,230 20E June 13, 2017 Ambit Capital Pvt. Ltd. Page 17

18 Weak YTD performance = value comfort Dabur s share price has underperformed Sensex/FMCG sector by 15%/23% YTD We believe this was justified given the impact of demonetisation and potential disruption due to GST on Dabur is higher than peers. This is due to Dabur s: 1) higher rural exposure; 2) weaker market share, which would make the capital-constrained wholesale channel prefer higher other brands with higher market shares; and 3) stalling of new product launches, which were a bigger driver of growth for Dabur than peers. We expect Dabur to witness a re-rating and close its steep valuation gap of 2 vs the sector as earnings rebound from 2HFY18. Our DCF-based TP of `330 (17% upside) implies a 33x FY19E P/E, marginally below the sector s current valuation of 35x FY19E P/E. Relative underperformance has provided valuation comfort We believe Dabur s underperformance now prices in near-term hit to earnings and has created valuation comfort. Historically, Dabur s one-year forward P/E has been at ~1 discount to the FMCG sector P/E. Due to Dabur s share price underperformance since 2017, it is trading at ~2 discount to FMCG sector P/E. Exhibit 36: Dabur has underperformed Sensex and FMCG index Exhibit 37: Dabur is currently trading at ~2 discount to FMCG sector Jan 16-Jan 30-Jan 13-Feb 27-Feb 13-Mar 27-Mar 10-Apr 24-Apr 8-May 22-May 5-Jun 5% -5% -1-15% -2-25% Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Dabur Sensex BSE FMCG Dabur 1yr Fwd PE Prem/ Disc to Sector 5 Year average We believe the FMCG sector s current valuation at ~35xFY19E P/E looks expensive and builds in mid-teen growth over the next ~20 years. Given penetration rates for most Home and Personal Care categories are now reaching saturation levels, for such high growth rates to sustain a company must be active in any of the following: 1) seeding new age, discretionary categories like cosmetics, perfumes, conditioners etc.; 2) leading premiumisation through higher-end variants like liquids and gels (shower, dish wash, detergents) or brands; 3) focus on health and wellness which provide long and strong growth ramp with high profitability; or 4) be involved in F&B categories which have low penetration rates and huge share gain potential from unorganised segments. June 13, 2017 Ambit Capital Pvt. Ltd. Page 18

19 Exhibit 38: F&B is placed higher in our pecking order in the FMCG space ROCE - 6 Low Medium High , Size of the bubble denotes valuations In the case of Dabur, we believe it is set to ride Health & Wellness and F&B planks along with some degree of participation in seeding new age categories as well. Hence, we believe Dabur s current discount to FMCG sector is unjustified. (i) Superior sales/eps CAGR of 16%/18% over FY17-20E (vs 15%/17% for the sector) in the near term and (ii) potential for earnings upgrade and re-rating if OTC Ayurveda portfolio launch is more successful than anticipated in the longer run provide valuation support. Exhibit 39: Relative Valuation Relative valuations Staples CMP Mcap (`) Tobacco AlcoBev Fut (LC bn) Stance Target Price Up / Down P/E based on CMP EV/EBITDA ROCE (%) Implied P/E based on TP June 13, 2017 Ambit Capital Pvt. Ltd. Page 19 Div. Yield (%) Rev growth EPS Growth FY18E FY19E FY18E FY19E FY18E FY19E FY18E FY19E FY16 FY17-20 FY17-20 Nestle 6, SELL 6, % 16.1% 20.2% GSK Consumer 5, SELL 4,950-8% % 11.4% 12.6% Colgate 1, SELL % % 16.8% 18.2% Godrej Consumer 1, SELL 1, % 12.1% 11.9% Dabur BUY % % 16.3% 17.6% Marico SELL % % 15.3% 16.5% Britannia 3, SELL 2, % 16.3% 17.7% Hatsun Agro BUY 530-9% % % ITC 304 3,698 BUY % % 15.5% 17.8% Average -11% % 15.6% 19.3% Tobacco Fut HPC Fut Paints Fut AlcoBev We turn BUYers with DCF-based TP of `330 Given the cash-generative nature of the business, we use a three-stage DCF-based model to arrive at a fair value for Dabur. The assumptions for the weighted average cost of capital and terminal growth rates are shown in the exhibit on the right margin. We have assumed longer-term debt:equity ratio of zero given its strong cash position and free cash flow generation. Hence, the company has enough surplus cash available on its balance sheet for future capex. Stage 1 (FY17-20): Over FY17-20, we expect revenue CAGR of 16% due to new product launches and revival of macro demand. We expect a 130bps increase in EBIT margin over FY17-20 from 17.7% to 19. in FY20. This will result in PAT growth of 18% CAGR and increase in RoE from 28% to 3 over FY Stage 2 (FY21-35): Over FY21-35, we assume that revenue growth will moderate from 16% in FY21 to 1 in FY35. We assume a gradual increase in EBIT margin from 22% in FY22 to 3 in FY30 (including other income) due to higher contribution from high-margin OTC & Ethical business and improving profitability of F&B and International businesses. Beyond FY30, EBIT margin will remain stable at 3 until FY45. We assume sales/ebit CAGR of 14%/15% over FY HPC Paints F&B F&B Fut - Low 1 2 Medium High 6 Growth WACC assumptions Item Value Risk-free rate (%) 8.5 Beta (2-year monthly) 0.50 Equity risk premium (%) 9.0 Cost of equity (%) 13.0 Cost of debt (%) 12.0 Debt/Equity ratio (%) Tax rate (%) 23.0 WACC (%) 13.0 Terminal growth rate (%) 5.0

20 Stage 3 (FY35 onwards): Beyond FY35, we factor in terminal growth of 5% assuming ~3% inflation and ~2% population-led volume growth. Based on these forecasts, we estimate a DCF-based valuation of `330 (upside of 16%), implying FY19E P/E multiple of 33x. The cash flow and return profiles generated by our model are shown in the exhibits below. Exhibit 40: Dabur s cash flow profile (` mn) Exhibit 41: Dabur s return profile 25,000 20,000 15,000 10,000 5,000 - FY11 FY12 FY13 CFO FY14 FY15 FY16 FY17 FY18E FY19E FY20E Free Cash Flow (RHS) 25,000 20,000 15,000 10,000 5,000 - (5,000) (10,000) FY11 FY12 FY13 FY14 ROE (LHS) EPS Growth FY15 FY16 FY17 FY18E FY19E FY20E EBITDA Margin YoY Growth in sales Exhibit 42: Dabur s one-year forward P/E bands Exhibit 43: Dabur s one-year forward EV/EBITDA bands Dabur 1Yr Fwd P/E Dabur 5Yr avg P/E Dabur 1Yr Fwd EV/ EBITDA Dabur 5Yr avg EV/EBITDA May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research Exhibit 44: Our assumption of operating metrics in the fade period of our DCF FCF (Rs bn) EBIT margin (RHS) WACC (RHS) ROE (RHS) % % 25% 15% - 5% FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E FY31E FY32E FY33E FY34E FY35E June 13, 2017 Ambit Capital Pvt. Ltd. Page 20

21 Key driver of target price change structural increase in earnings trajectory There are two key drivers for our change in TP: Near-term earnings upgrade of 2-4% for FY18-20E led by our expectation of a faster than expected pace of new product launches and sustained margin gains due to turnaround in fruit juice business despite higher A&P on new launches. Structurally higher margin trajectory over the fade period as we expect OTC Ayurveda portfolio to be margin-accretive for Dabur in the longer run. Exhibit 45: Changes to our estimates New Old Change (%) Dabur FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E TP (`) % Sales (` mn) 88, , ,287 88, , , % 0.7% 2.1% EBITDA (` mn) 17,704 20,895 25,103 16,959 20,103 23, % 3.9% 6.4% EBITDA margin (%) % 20.7% 19.3% 19.7% 19.9% PBT (` mn) 18,723 22,216 27,003 18,113 21,821 25, % 1.8% 4.2% PAT (` mn) 14,604 17,107 20,792 14,128 16,803 19, % 1.8% 4.2% EPS (`) % 1.8% 4.2% June 13, 2017 Ambit Capital Pvt. Ltd. Page 21

22 Catalysts Revival in sales in 2HFY18: Dabur would witness volume-led growth from 2HFY18 due to improvement in rural demand led by good monsoon and aggressive new product launches. New launch pipeline to accelerate: We expect Dabur to resume aggressive launch of new products, especially in OTC Ayurveda. This should boost sales growth from 2HFY18. Margin gain in F&B: We expect Dabur to gain margins starting FY18 led by turnaround in juices profitability as scale efficiencies from newly set up sourcing facilities in India and Sri Lanka kick in. Risks Higher-than-expected impact on demand in rural areas: Prolonged impact of weak consumer sentiment and supply chain disruption (from stalling of wholesale channel) in rural areas due to GST could impact recovery in demand. This could pose risks to our sales growth estimates in FY18. Aggressive expansion by peers: Aggressive expansion by ITC in the fruit juices category and by Patanjali in OTC and oral care could impact growth of Dabur. Delay in new product launches: Delay in new product launches in OTC and Ethical can impact sales growth. Weakness in International business to continue: Prolonged impact of macroeconomic headwinds in MENA and higher-than-expected currency depreciation impact in Africa could impact earnings of Dabur s International business. Ambit vs consensus Exhibit 46: Our FY18/19 estimates vs consensus (` mn) Divergence from Ambit Consensus consensus Comments FY18E Net Sales (` mn) 88,530 86,943 Expect marginal higher sales than consensus mainly due to our higher growth in 2% OTC and turnaround in international business EBITDA (` mn) 17,704 16,596 Combination of higher sales and higher profitability compared to consensus leads 7% to higher EBITDA as we expect better category mix (OTC Ethicals) and turnaround in Juices to offset new launch related costs EPS (`/share) EPS growth is lower than EBITDA growth due to higher depreciation from 2% commissioning of Guwahati plant and higher tax rate than consensus FY19E Net Sales (` mn) 102,942 97,236 Expect marginal higher sales than consensus mainly due to higher growth in OTC 6% and ethical EBITDA (` mn) 20,895 18,857 FY19 s divergence builds upon FY18 s outperformance as we expect similar drivers 11% to continue EPS (`/share) We expect Dabur to continue building upon FY18 s earnings growth drivers of 5% margin-accretive new launches and turnaround in Juices and international businesses. Source: Bloomberg, Ambit Capital research Explanation of our forensic accounting scores Exhibit 47: Explanation of our forensic accounting scores Segment Score Comments Accounting Predictability GREEN AMBER In the past, Dabur has reported strong cash conversion and working capital management, and low levels of loans and advances and contingent liabilities. So we give a high rating to its accounting quality. Dabur remains in top Decile of D1 over and ranks highest in the FMCG sector. The predictability of Dabur s profit has been stable in the last 6 quarters due to stable input cost. However, revenue predictability has been weak due to demonetisation. Earnings momentum RED Dabur s estimates have been trimmed by Consensus for FY17 and FY18 due to the impact of demonetisation. June 13, 2017 Ambit Capital Pvt. Ltd. Page 22

23 Exhibit 48: Forensic score analysis Exhibit 49: Greatness score analysis Source: Ambit HAWK, Ambit Capital research Source: Ambit HAWK, Ambit Capital research Exhibit 50: Dabur s forensic score evolution has been in top decile over Exhibit 51: Dabur s greatness score evolution has improved over Source: Ambit HAWK, Ambit Capital research, Note: Using our accounting framework, we categorise the market into deciles on the basis of their accounting quality with D1 indicating the best decile and D10 indicating the worst decile. Our analysis points towards a strong link between accounting quality and share price performance. Source: Ambit HAWK, Ambit Capital research, Note: On our greatness framework, on a scale of 0 to 100, a small minority of outstanding companies tend to score above 67 whilst most companies tend to have scores below 50 June 13, 2017 Ambit Capital Pvt. Ltd. Page 23