The following is the Stock Analyst Note on Dabur India Ltd, published by Morningstar Analyst Suruchi Jain. Registered Morningstar users can view the full report (PDF) here, which includes our complete overview, thesis, valuation, risks and our bull and bear cases.
Competitive pressures remain intense, but Dabur’s unique product offering combined with its commitment to launching products that resonate with consumers, drove a nearly 18% top-line increase in the first nine months of 2013 (reflecting 15% domestic growth and 19% international growth).
While the sales growth figures are tracking slightly below our expected growth of 21.1% for the full year, we are maintaining our fair value estimate of INR 127 per share, as we anticipate higher growth from international business in the coming quarter, once the transition of Namaste’s brand "Organic Root Stimulator to ORS" that was initiated this quarter is complete, and the Namaste business experiences positive growth again.
Currently, we believe Dabur’s shares are fairly valued at 24 times fiscal 2014 adjusted earnings. While sales growth slowed to 12.3% year on year in the third quarter, due to slower international sales of 9% during the quarter compared to 24.4% revenue growth in the first half of 2013; consumers are continuing to buy Dabur’s products.
Its product categories of shampoos and home care posted outsized growth at around 30% each. Shampoos grew due to conversion of nonusers in the rural areas with its low-priced one rupee sachets. We believe Dabur’s proposition of a natural shampoo has appealed to first-time rural users, and its newly increased coverage is enabling the company to drive availability of its products in the interiors of India, as the purchasing power of the rural Indian is on the rise.
We have yet to see if these trials convert to repeat usage and ultimately loyal consumers of Dabur shampoo in the future.
Dabur mitigated the impact of high input costs with moderate price increases and cost management initiatives to realize a nearly 200-basis-point jump in its gross margins to 51.4% for third quarter compared to last year.
However, it also invested a much higher proportion of its sales on advertising this quarter (increasing it to 14.4% of sales versus 13.6% in the same quarter last year) which resulted in a muted increase in consolidated operating margins by 50 basis points to 14.9%.
We view the higher advertising spends in a positive light, as this indicates that Dabur is committed to investing behind its brands and ensuring that its competitive advantages remain intact. This is crucial, in our view, given the intensely competitive landscape that exists in the household and personal care categories in which it competes.
Overall, we continue to assume that consolidated operating margins for the company will remain depressed at 14.9% for fiscal 2013 (the first nine months have added up to 14.6% margins) and continue to remain at these levels as Dabur begins to compete with heavyweights in the industry for share in the household and personal products, food and beverage space. The high operating margins of 17% witnessed in fiscal 2010 and 2011 are largely behind us.