CMP: INR354 TP: INR415(+17%) Buy

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1 Krishnan Sambamoorthy Research analyst Vishal Punmiya Research analyst Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on Bloomberg, Thomson Reuters, Factset and S&P Capital. BSE SENSEX S&P CNX 35,965 11,028 Bloomberg DABUR IN Equity Shares (m) M.Cap.(INRb)/(USDb) / Week Range (INR) 368/263 1, 6, 12 Rel. Per (%) -4/4/-2 Avg Val, INRm Free float (%) 31.9 Financials & Valuations (INR b) Y/E Mar 2018E 2019E 2020E Net Sales EBITDA NP EPS (INR) EPS Gr. % BV/Sh. INR RoE (%) RoCE (%) P/E (x) P/BV (x) Estimate change TP change Rating change 31 January 2018 Results Update Sector: Consumer Dabur CMP: INR354 TP: INR415(+17%) Buy Strong domestic performance; Rural to contribute incrementally Dabur s consol. sales grew 6.1% YoY to INR19.7b (est. of INR20.7b). EBITDA rose 20.8% YoY to INR4.0b (est. of INR4.1b). Adj. PAT increased 13% YoY to INR3.3b (est. of INR3.6b). Comparable domestic FMCG business (70% of revenues) sales grew 17.7% YoY, led by underlying volume growth of 13% YoY (est. of +15%). Segmental performance: Oral care, hair oil and health supplements reported growth of 23%, 16.7% and 19.5%, respectively. On the other hand, foods reported flat numbers on a very high base. International sales grew 5% on a constant currency (CC) basis. Consol. EBITDA margin expanded 250bp YoY to 20.5% (est. of 19.8%), led by gross margin expansion of 220bp YoY to 51.6%. Lower other expenses (-40bp YoY) and ad spends (-10bp YoY) were partially offset by higher staff costs (+20bp YoY). Lower-than-estimated other income led to a miss in adj. PAT. Reported standalone sales, EBITDA and adj. PAT grew 12.9%, 27.5% and 15.9%, respectively. EBITDA margin expanded 240bp YoY to 21.4%. Concall highlights: 1) Rural growth was strong at 24% YoY in, mainly led by initiatives like Project Buniyaad. 2) Expect commodity price inflation from 4QFY18; company is likely to take price hike only 1QFY19 onward in the event of further inflation in raw material costs. Valuation view: We cut FY19/20E EPS by 3%/3.5 to factor in the change in the other income estimate. The much-vaunted earnings revival in the sector appears poised to come through, and rural dependent plays are likely to be at the vanguard. Dabur has also addressed the issues of market share losses in its two key categories of juices and honey, while oral care continues to do very well. With expected EPS CAGR of ~18% v/s less than 12% over FY14-17, our earlier target multiple discount of 10% to three-year average no longer applies. We value the stock at 41x Dec 19E (10% premium to three-year average), deriving a target price of INR415. Maintain Buy. Quarterly Perf. (Consol.) (INR M) Y/E March FY17 FY18 FY17 FY18E FY18 Var. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 3QE (%) Domestic Vol Growth (%) Net Sales 19,522 19,816 18,529 19,147 17,901 19,589 19,664 20,591 77,014 77,745 20, % YoY Change (%) Total Exp 16,034 15,730 15,190 14,971 14,812 15,390 15,630 16,165 61,925 61,997 16,599 EBITDA 3,488 4,087 3,339 4,176 3,089 4,199 4,035 4,426 15,089 15,749 4, % Margins (%) YoY Growth (%) Depreciation ,429 1, Interest Other Income ,984 2, PBT 3,637 4,456 3,697 4,314 3,378 4,508 4,162 4,619 16,104 16,667 4, % Tax ,303 3, Rate (%) Adjusted PAT 2,928 3,573 2,938 3,337 2,787 3,619 3,321 3,611 12,769 13,338 3, % YoY Change (%) E: MOSL Estimates

2 Key Quarterly Charts Exhibit 1: Domestic FMCG business volumes grew 13% YoY Domestic volume growth (%) (2.5) (5.0) 2.4 (4.4) Jun-14 Sep-14 Mar-15 Exhibit 2: Consolidated reported net sales increased 6.1% YoY to INR19.7b, underlying GST adjusted constant currency growth was 12.9% Net Sales (INR b) Sales Growth (% YoY) (5.1) (5.8) (4.7) (8.3) (1.1) QFY15 2QFY15 4QFY15 Exhibit 3: Category wise performance Category Growth (%) 4QFY15 Hair Care Health Supplements Oral Care Foods Digestives Skin care Home Care OTC & Ethicals IBD (organic) January

3 Exhibit 4: Gross margin expanded by 220bp YoY to 51.6%... Gross Margin (%) Exhibit 5:..while consol. EBITDA margin expanded 250bp YoY to 20.5% EBITDA Margins (%) 1QFY15 2QFY15 4QFY QFY15 2QFY15 4QFY Exhibit 6: Other expenses and ad spends went down by 40bp and 10bp YoY respectively, staff cost were up by 20bp YoY A&P to sales (%) Staff costs (%) Other expenses (%) QFY15 2QFY15 4QFY15 Exhibit 7: Consolidated reported Adj. PAT grew 13.1% YoY to INR3.3b PAT (INR b) PAT Growth (%) (7.5) 0.7 (4.8) QFY15 2QFY15 Mar January

4 Key Takeaways from Concall Additional comments on results Mix, GST changes and some level of benign raw material cost led to gross margin expansion. Lower consumer promotion compared to base quarter and network optimization led to good margins in food business in. Ad spends were low in international business, as the business environment is still not supportive. Other income had exceptional capital gain in base quarter of around INR160m. 10% of foods business is culinary; rest is beverages. Competitive intensity seen in beverages from small players like Paperboat and other value players. Recovered lost ground in honey from competition. Channel-wise LTL growth: GT distributors grew 13% YoY, rural wholesale grew 26%, MT grew 17.6%, cash & carry grew 16%, CSD declined 22.5%. Chyawanprash, amla hair oil, honey are key products sold in CSD channel. Urban and rural growth Rural growth was 24% YoY. Rural growth was strong mostly led by the company s initiatives like Project Buniyaad. Project Buniyaad will lead to better execution in rural areas by putting more people on ground. Double-digit growth possible in rural India for Dabur. East and south saw better rural growth compared to north and west. International business outlook looks better from 4QFY18 Expect substantially better performance in international business from 4QFY18 onward. Overhang of currency should go away from next quarter. Egypt doing very well, but currency impacting growth. Pain from Namaste will plateau in 4QFY18. There is some scope of cross pollination of products from Dubai business into India business. Segmental Natural growing faster than non-natural in toothpaste category. Company gaining some lost market share in UP. Growth in hair oils driven by LUPs. Project Buniyaad was instrumental for growth. 10 products launched already in Ethicals through prescriptive space. Will wait for sometime before taking them OTC. Growth would be in double-digit from FY19. Commodity costs movement and pricing action plans Commodity inflation to be seen starting 4QFY18. Will be able to maintain margins through price hike even if inflation increases further. Will only increase prices from 1QFY19 as it is sitting on lower-priced raw material inventory, which will last till 4QFY January

5 Other takeaways Distribution reach crossed 1.02m outlets led by addition in urban. Not increased touch points in rural but focusing on increasing SKUs in rural retail outlets. There will be some impact from e-way bill implementation on distribution starting from 1 st Feb. E-way bill will be a big blow to urban wholesale. Valuation and view Rural outlook appears to be buoyant, with companies like HUL, Jyoti, Emami and now Dabur reporting either similar or faster growth in rural sales compared to urban sales after a long time. Worries on both wholesale channel and rural sales (in both Dabur has disproportionately high exposure compared to peers) are actually receding faster than expected. Importantly, the momentum in rural sales has started even before the benefits of good monsoon, and government initiatives like DBT, MSP increases & farm loan waiver, have started to come in. The much-vaunted earnings revival in the sector appears poised to come through, and rural-dependent plays are likely to be at the vanguard. Dabur has also addressed issues of market share losses in two key categories juices and honey, while oral care continues to do very well. We value the stock at 41x December 2019E (10% premium to 3 year average), deriving a target price of INR415. Maintain Buy. Exhibit 8: There is cut of 2.8%/3.5% in our FY19/FY20 EPS estimates majorly due to a change in other income estimates INR Mn New Old Change FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E Sales 77,745 91, ,877 78,740 91, , % -0.6% -0.6% EBITDA 15,749 18,700 21,624 15,816 18,775 21, % -0.4% -0.5% PAT 13,338 15,901 18,485 13,632 16,357 19, % -2.8% -3.5% Exhibit 9: Dabur P/E (x) P/E (x) Avg (x) Max (x) Min (x) +1SD -1SD Jan-08 Apr-09 Jul-10 Oct-11 Jan Apr Jul Oct Jan-18 Exhibit 10: Consumer sector P/E (x) P/E (x) Avg (x) Max (x) Min (x) +1SD -1SD Jan-08 Apr-09 Jul-10 Oct-11 Jan-13 Apr-14 Jul-15 Oct-16 Jan January

6 Exhibit 11: Valuation Matrix Company Consumer Reco CMP (INR) Target Price Upside (INR) (%) Mkt Cap EPS Growth YoY (%) P/E (x) RoE (%) Div. (%) (INR B) (USD B) FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY18E Asian Paints Neutral 1,131 1, , Britannia Inds. Buy 4,673 6, Colgate-Palm. Buy 1,120 1, Dabur India Buy Emami Buy 1,124 1, Godrej Cons. Neutral 1,053 1, GlaxoSmith C H L Neutral 6,679 5, Hind. Unilever Buy 1,370 1, , ITC Neutral , Jyothy Lab. Neutral Marico Neutral Nestle India Neutral 7,465 8, P & G Hygiene Neutral 9,244 9, Page Industries Buy 21,571 28, Parag Milk Neutral Pidilite Inds. Buy 896 1, United Breweries Buy 1,142 1, United Spirits Neutral 3,280 3, Retail Jubilant Food. Neutral 2,032 2, PC Jeweller Buy Titan Company Buy January

7 Financials and valuations Income Statement (INR Million) Y/E March E 2019E 2020E Net Sales 78,065 78,688 77,014 77,745 91, ,877 Change (%) Total Expenditure 65,108 63,505 61,925 61,997 72,313 82,253 EBITDA 12,957 15,183 15,089 15,749 18,700 21,624 Change (%) Margin (%) Depreciation 1,150 1,332 1,429 1,539 1,590 1,641 Int. and Fin. Charges Other Income - Recurring 1,788 2,172 2,984 2,984 3,282 3,610 Profit before Taxes 13,194 15,538 16,104 16,667 19,869 23,098 Change (%) Margin (%) Tax 2,347 2,840 3,110 3,200 3,815 4,435 Tax Rate (%) Profit after Taxes 10,685 12,539 12,801 13,367 15,935 18,525 Change (%) Margin (%) Minority Interest Adjusted PAT 10,658 12,512 12,769 13,338 15,901 18,485 Balance Sheet (INR Million) Y/E March E 2019E 2020E Share Capital 1,757 1,759 1,762 1,762 1,762 1,762 Reserves 31,785 39,842 46,712 54,588 61,187 64,533 Net Worth 33,541 41,601 48,473 56,349 62,948 66,294 Minority Interest Loans 9,608 8,043 9,115 10,000 9,000 9,000 Capital Employed 43,331 49,860 57,837 66,626 72,259 75,644 Gross Block 25,409 27,802 29,802 30,802 31,802 32,802 Less: Accum. Depn. -6,638-8,304-9,732-11,271-12,862-14,503 Net Fixed Assets 18,771 19,499 20,070 19,531 18,941 18,300 Capital WIP Investments 18,134 25,239 32,402 35,642 39,206 43,127 Current 18,120 25,225 32,402 35,642 39,206 43,127 Non-current Curr. Assets, L&A 23,655 26,020 25,886 31,712 41,211 45,726 Inventory 9,733 10,965 11,071 11,041 12,898 14,745 Account Receivables 7,108 8,097 6,510 8,346 9,679 11,126 Cash and Bank Balance 2,760 2,204 3,009 6,423 12,034 12,463 Others 4,053 4,754 5,296 5,902 6,601 7,392 Curr. Liab. and Prov. 17,144 20,579 20,177 19,914 26,755 31,163 Current Libilities 14,122 16,739 16,313 15,886 20,672 22,026 Provisions 3,022 3,841 3,864 4,028 6,082 9,137 Net Current Assets 6,511 5,440 5,709 11,798 14,456 14,563 Deferred Tax Liability Application of Funds 43,331 49,860 57,837 66,626 72,259 75,645 E: MOSL Estimates 31 January

8 Financials and valuations Ratios Y/E March E 2019E 2020E Basic (INR) EPS Cash EPS BV/Share DPS Payout % Valuation (x) P/E Cash P/E EV/Sales EV/EBITDA P/BV Dividend Yield (%) Return Ratios (%) RoE RoCE RoIC Working Capital Ratios Debtor (Days) Asset Turnover (x) Leverage Ratio Debt/Equity (x) Cash Flow Statement (INR Million) Y/E March E 2019E 2020E OP/(loss) before Tax 13,194 15,538 16,104 16,667 19,869 23,098 Int./Div. Received -1,788-2,172-2,984-2,984-3,282-3,610 Depreciation & Amort. 1,150 1,332 1,429 1,539 1,590 1,641 Interest Paid Direct Taxes Paid -2,347-2,840-3,110-3,200-3,815-4,435 (Incr)/Decr in WC ,675 2, CF from Oper. 9,694 12,857 12,515 9,874 17,838 17,511 Extraordinary Items (Incr)/Decr in FA -1,567-2,338-1,973-1,000-1,000-1,000 Free Cash Flow 8,127 10,519 10,542 8,874 16,838 16,511 (Pur)/Sale of Invt. -7,369-7,105-7,163-3,240-3,564-3,921 CF from Invest. -8,936-9,443-9,136-4,240-4,564-4,921 Issue of Shares (Incr)/Decr in Debt 97-1,566 1, ,000 0 Dividend Paid -3,948-3,506-4,469-4,668-7,951-12,940 Others 658 1, ,562 1, CF from Fin. Act. -3,191-3,970-2,573-2,220-7,663-12,162 Incr/Decr of Cash -2, ,414 5, Add: Opening Bal. 5,194 2,760 2,204 3,009 6,423 12,034 Closing Balance 2,761 2,204 3,010 6,423 12,034 12,464 E: MOSL Estimates 31 January

9 Corporate profile Company description Dabur India is the second largest FMCG company in India, in terms of Product portfolio. Dabur is a market leader in Chyawanprash category and is increasing its presence in other traditional categories like Hair Care, oral care, household care and foods. Dabur's acquisition of Fem Care given it a strategic presence in the high potential skin care segment. Exhibit 1: Sensex rebased Source: MOSL/Bloomberg Exhibit 2: Shareholding pattern (%) Dec-17 Sep-17 Dec-16 Promoter DII FII Others Note: FII Includes depository receipts Exhibit 4: Top management Name Anand Burman Amit Burman Sunil Duggal A K Jain Designation Chairman Vice Chairman Executive Director Company Secretary Source: Capitaline Exhibit 3: Top holders Holder Name % Holding Life Insurance Corporation Of India 4.3 First State Investments Icvc- Stewart Investors Asia Pacific Leaders Fund 1.2 Barclays Merchant Bank (Singapore) Ltd. 1.2 Matthews Pacific Tiger Fund 1.2 Birla Sun Life Trustee Company Private Limited Ac Birla Sun Life Balanced 95 Fund 1.1 Source: Capitaline Exhibit 5: Directors Name Name Ajay Dua* Mohit Burman P N Vijay* R C Bhargava* S Narayan* Saket Burman Sanjay K Bhattacharrya* P D Narang Falguni Nayar* Source: Capitaline *Independent Exhibit 6: Auditors Name G Basu & Co Price Waterhouse & Co Bangalore LLP Ramanath Iyer & Co Walker Chandiok & Co LLP Type Statutory Internal Cost Auditor Statutory Source: Capitaline Exhibit 7: MOSL forecast v/s consensus EPS (INR) MOSL forecast Consensus forecast Variation (%) FY FY FY Source: Bloomberg 31 January

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