Morningstar Analyst Suruchi Jain recently initiated coverage on Dabur India. Here are excerpts from the Stock Analyst Report.
Registered Morningstar users (registration is free) can access the full report by clicking the link provided at the bottom. The full report containts our fair value estimate for the stock, 'Consider Buy' and 'Consider Sell' prices.
A 125-year-old brand name in the Indian consumer market, Dabur is known as a provider of health and consumer products. The company generates over INR 50 billion in revenue, and is one of the smaller consumer players in India. Its key point of differentiation is its herbal appeal, as most products have a combination of natural ingredients based on the ancient Indian medicinal practices of Ayurveda. We believe Dabur's products are uniquely positioned, lending the company a narrow economic moat. With more than 15 different products, Dabur's well-diversified product portfolio gives it revenue stability across business cycles and seasons. Hence, we give the stock a medium uncertainty rating.
Dabur wishes to maintain its herbal appeal going forward, and we believe this is a good idea. Indians and Middle Eastern population, accounting for over 70% of Dabur's customers, have a propensity to use natural products over artificial ones. Since ancient times, before modern medicine prevailed Indians used home remedies to cure major ailments. Even today, Indians prefer trying home remedies before visiting a doctor for minor ailments. For example, hair oil accounts for a fourth of Dabur's revenues. Oiling one's hair prior to washing it is a typical hair care regimen in the Indian subcontinent, and is unlikely to go away despite the gradual move toward using post-wash conditioners and hair serums. The hair oil category in India, worth INR 50 billion ($1 billion), has been growing at 13% CAGR between 2005 and 2010, and Dabur holds 16% market share in this category.
Dabur is expanding its presence into new products and geographies while maintaining its herbal niche. It acquired Namaste Laboratories in November 2010, to enter the African ethnic hair care segment, valued at $1.4 billion in the U.S. alone. Namaste Labs has been able to grow to a 12% market share in 2010, from zero share in 1996, despite having stiff competition from larger players like L'Oreal OR and P&G PG in its U.S. market, where Namaste generates 70% of its revenue. Namaste's key brand 'Organic Root Stimulator' has natural ingredients in it, and is a good fit in Dabur's product portfolio. The company's strategy has been to enter product categories with sizable addressable markets, and also more intense competition. However, we believe the company's focus on herbal-based products will help differentiate its offering. While Dabur may only capture a small share of these large markets, we believe the incremental gains should lead to significant growth for the company.
While growth through acquisition can inherently be risky, the company has displayed success in this strategy. Dabur has successfully integrated and grown acquired businesses in the past, and we see it continuing to drive similar results in newly acquired businesses. For example, Dabur's 2005 acquisition of Balsara gave it access to herbal toothpaste and home care brands in India. Balsara was a loss-making unit which Dabur turned profitable in a year's time with double the sales, primarily due to better distribution of products and savings in procurement. Dabur also increased its market share from 9.8% in 2006 (after the Balsara acquisition) to 14.1% in 2011 in the Indian toothpaste market, valued at INR 35 billion and growing at 10% annually. We see the company already taking actions to improve the profitability of its latest acquisition, Namaste Laboratories, by bringing manufacturing of products closer to its end consumers, and are confident that the company will be able to drive margin improvements in this business going forward.
Overall, we believe Dabur is in a position of strength with its herbal appeal as a key differentiator as it moves into larger, more competitive product categories and geographies. Given its strong execution capabilities and track record of successful acquisition integration, we believe Dabur's business will do well in the long term. While its recent acquisitions have put slight pressure on its return on invested capital, the returns are still far above its cost of capital and will continue to remain so.
Dabur's well-diversified product mix provides a steady revenue stream that is less susceptible to seasonal swings. However, the company is increasingly expanding into segments where it will compete head-on with large foreign firms. While Dabur's herbal niche should allow it to differentiate its offering, it would be difficult for the company to match larger firms in terms of distribution reach and advertising spending. We believe its small share in a large market strategy should pay off in the long run. With the consumer products in India growing at 15%-20% per annum, there is enough headroom for players of all shapes and sizes.
Also, with its international expansion and overseas raw material sourcing, Dabur is increasingly becoming susceptible to country risk and global currency movements. However, given its low revenue cyclicality, low financial leverage, and medium operating leverage, Dabur has low systematic risk. We therefore assign the company a medium uncertainty rating.
Dabur India Limited was established in 1918 by the Burman family, which owns 68.7% of the company. The company generated INR 53 billion in revenues in fiscal 2012. Dabur's products include personal, home, and health care products that are based on the principles of Ayurveda and alternative medicine, prepared from mixtures of natural herbs native to India. The company began its operations in India and has since expanded its presence to the Middle East, Africa, and North America, and now generates 30% of its revenues outside of India.