A century old consumer brand name, Dabur is known as a provider of health and consumer products in the Indian market. The company generates nearly INR 62 billion in annual revenue, and is one of the relatively 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 it 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 has made large strides in establishing a distribution network in the backward regions of India, which should help the firm offset slowing urban growth. The company’s expanded distribution footprint reached over 33,000 villages across India as of June 2013, versus about 15,000 in March 2011. We expect rural consumers (who now account for 47% of Dabur’s India sales) to continue to garner increased spending power over the medium term, as good rainfalls this year will increase agricultural production and rural incomes with it. By having an established network to cater to these inner regions of the country, Dabur can expose new consumers to its full range of products. However, because Dabur isn’t alone in its aspirations, we think the onus remains on the company to ensure that it is constantly bringing new products to market that excite consumers, or risk losing out to other local and global players.
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 strongly despite having stiff competition from larger players like L’Oreal and Procter & Gamble in its U.S. market, where Namaste generates 70% of its revenue. Namaste’s key brand ‘Organic Root Stimulator’ (rebranded as ‘ORS’) has natural ingredients in it, and is a good fit in Dabur’s product portfolio. Dabur’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. The company has successfully integrated and grown acquired businesses in the past. With its Namaste acquisition as well, the company has been quick to localize manufacturing which should drive significant cost savings in the region, over the medium to long term. And we doubt the firm’s thirst for acquisition-driven growth has been quenched. The company maintains a large pile of cash (INR 2 billion as of June 2013), which could be put to use to further build out its geographic and product platform. However, we believe there may be some time before Dabur pursues its next target, as it strives to fully integrate and leverage recent deals.
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.