Dabur’s first-quarter fiscal 2015 revenue and earnings grew by 13.2% and 13.3%, respectively, both behind our full-year forecast of 15.3% and 16.9%. Earnings before interest and tax clocked a 12.9% operating margin, versus our 15.2% estimate for 2015. This was on account of relatively slower sales growth of 13.2% versus our 15.0% estimate in the most profitable consumer care business, which accounts for over 80% of total sales. However, we remain upbeat on Dabur’s full-year performance as first-quarter growth and profits track seasonally slower, as evidenced in prior years. These lower margins are similar to those witnessed a year earlier.
What was encouraging from a segmental perspective was that the foods category witnessed growth of 21.6%, ahead of our full-year forecast of 19.0%. As we recently highlighted in our investment thesis, the foods category is the fastest growing in Dabur’s product portfolio, and a key focus area for management. This segment includes juices and beverage products sold under the Real brand name, which recorded robust, 24.0% growth over the prior year, along with gains in market share, as per the company’s presentation. This confirms our narrow economic moat rating, as it has been able to compete on the same turf against global giants Pepsi and Coca-Cola, given its unique “health-oriented” products, and brands developed indigenously over the last several years.
Our long term outlook continues to hold that the firm can expand margins as it grows its most profitable segments of consumer care and foods. We see full-year operating margins touching 15.2%, but we're holding the line on our INR 168 fair value estimate. We believe the stock is modestly overvalued at current prices.
Investment Thesis
We believe Dabur's herbal brand is uniquely positioned, lending the firm a narrow economic moat. With more than 15 different herbal products, a well-diversified product portfolio gives Dabur revenue stability across business cycles and seasons. The company has made large strides in establishing a distribution network in the more remote regions of India (reaching 38,250 villages in March 2014, from 33,000 villages in June 2013 and 15,000 in March 2011). On the urban distribution front as well, the company is including more chemists under its coverage and plans to expand this network to 75,000 chemists from the 53,000 it had in March 2014. However, Dabur isn't alone in its distribution expansion efforts. Other consumer firms like Hindustan Unilever are undertaking similar projects to widen the reach of their products. To stay relevant in an increasingly competitive market, Dabur will have to continue playing up its herbal strength in new products it launches.
One of the areas of focus for management has been the food category, which includes juices under the Real brand and culinary products under the Hommade brand. This segment has been growing at a compound annual rate of 25% over the past four years and is one of the fastest-growing categories in Dabur's product portfolio. Per the Assocham industry report, Dabur already has more than 50% share in the fruit juice market and is experimenting with other noncarbonated beverages, where heavyweights such as Coca-Cola and PepsiCo have less dominant market share. Dabur recently launched yogurt-based beverages and packaged coconut water, and we will be closely tracking consumer acceptance on this front. Overall, we believe these products will strengthen Dabur's differentiated positioning as a provider of herbal and natural products, and its expanded distribution footprint will allow it to continue expanding its top line at a healthy pace.
