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  • Stock Recommendation | Dabur India - REDUCE - Target price : 345

    Publish date: NOVEMBER 01, 2018

    Soft quarter; commentary a shade less bullish now.
    Dabur reported a soft, belowexpectations 2QFY19 earnings print with disappointment on revenue growth as well as margins. Management's growth outlook remains upbeat but the degree of bullishness has moderated. We trim our lowest-on-the-Street estimates a tad and retain our REDUCE rating on the stock. We like the Dabur story but continue to find the stock expensive. DCF-based fair value target remains unchanged at ₹345/share.

    Dabur's 2QFY19 earnings print was materially below our expectations and missed moderated Street estimates as well. The nub of the print was not in the miss per se; estimates miss earnings up or down every quarter and do so meaningfully quite often. The nub is in how the Street ignored the role of a soft base in the super-strong yoy comps in Dabur's 1QFY19 earnings print. Management's bullish commentary, which has now toned down a bit, played its role as well, to be sure. Management, while toning down its bullishness a tad, attributed the same to macro factors (monsoon, pre-election stimulus) falling short of their expectations.
    Consolidated revenues, EBITDA and PAT for the quarter stood at ₹20.92 bn (+7% yoy, 5% below estimate), ₹4.18 bn (flat yoy, 12% below) and ₹3.77 bn (+4% yoy, 11% below), respectively. Gross margins declined 145 bps yoy to 48.6% primarily reflecting the sharp GM decline in the international business; gross margins were down only marginally in the India business. EBITDA margin decline was arrested to 131 bps yoy (to 20%) on the back of adspend cuts (down 8% yoy in absolute terms, 108 bps margin kicker). Management indicated (a) higher BTL spends, and (b) festive season timing shift, as the drivers of lower adspends. Two-year CAGR on revenues, EBITDA and recurring PAT stood at a modest 3%, 2% and 3%, respectively. 1HFY19 EPS stood at ₹4/share, +11% yoy, off a soft base.
    Standalone revenues, EBITDA and PAT grew 7%, 1% and 8%, respectively. Gross margin decline was a modest 30 bps yoy while EBITDA margins declined 108 bps on account of sharp jump in employee costs (+22% yoy). Adspends were 3% lower yoy. Domestic volume and value growth stood at 8.1% and 8.6%, respectively with the low 0.5% implied realization growth reflecting higher promotional intensity.
    Despite the sharp recent correction, valuations at 32X FY2020 EV/EBITDA remain fairly rich. We reiterate our REDUCE rating on the stock with an unchanged fair value target of ₹345/share.

    Key category-wise highlights
    ▶ Hair care (22% of domestic sales). Within hair care business - (1) hair oils category posted 11.1% yoy growth as Dabur's Brahmi Amla continues to do well and the company is also seeing good traction in its coconut portfolio (including value added); management highlighted that they have gained market share in hair oil (+120 bps), (2) shampoos posted strong 49% yoy growth driven by ground activations and visibility drives. Management highlighted that even as the current strong volume growth in Shampoos is coming on a small base, they expect double digit growth trends to continue for a long time. Its shampoos currently reach 5 mn outlets and volume market share is close to 5%. Dabur has now become a dominant player in the rural markets in the North.
    ▶ Oral care (18% of domestic sales). Oral care posted strong growth of 3.9% yoy with toothpastes registering a 6.2% yoy growth. Management highlighted that the Red Toothpaste grew at 20% and the company continues to gain market share. However, its discount brand - Babool - is seeing high competitive pressures, particularly in the `10 price point. They have chalked out some plans for Babool as well and expect a revival in the next couple of quarters. They are also finalizing formulations for a whitening herbal toothpaste.
    ▶ OTC & Ethicals (9% of domestic sales). OTC & Ethicals category grew by 8% yoy led by good growth in Honitus, Shilajit and Lal Tail.
    ▶ Health supplements (12% of domestic sales) posted 27.5% yoy growth aided by strong growth in both Chyawanprash and Honey. Management highlighted that its honey market share is back to its highest level in both value and volume. They continue to benefit from the strong brand franchise in the category and expect strong growth to continue.
    ▶ Home care (8% of domestic sales). Home care category posted strong growth of 11% yoy. Management attributed this to strong performance of Odonil (led by Odonil Zipper) and Sanifresh.Odomos had a soft quarter on account of a weak HI season.
    ▶ Skin care (5% of domestic sales) posted 12% yoy growth aided by strong growth in Gulabari and Oxy bleaches.
    ▶ Foods (18% of domestic sales). Beverages (bulk of the food business) grew just 1.5%. Management highlighted that the key reason for the weak performance was the shift in festive season to the third quarter. On its juices portfolio, management remains quite confident of its new launches, including Active Coconut Water and newly launched masala flavors. Company continues to tackle competitive intensity through higher media spends and tactical promotions.
    ▶ International business (29% of consolidated sales). International business posted 7% c/c growth. Among the international markets - (1) GCC markets saw some pressure (down 7% yoy) due to consumption pressure and sharp decline in a few categories. Saudi Arabia rose 3%, (2) Egypt posted strong 27% yoy growth but the reported performance was impacted by sharp currency depreciation, (3) US business of Namaste continued to report in the green (up 4% yoy), (4) Turkey and Pakistan also reported good c/c growth but was impacted by sharp currency depreciation. Management highlighted that while the reported performance of international businesses does not look great, they still continue to trend well operationally.
    Other takeaways from earnings concall
    ▶ Volume growth outlook. While management still expects double-digit volume growth for the full year (FY2019E), the magnitude is likely to be lower as the management highlighted some macro concerns - lower stimulus in the run-up to the elections and also a patchy monsoon.
    ▶ Margins. Management highlighted its stance that their priority is to defend market share followed by volumes. Even though they would like to maintain a balance between the two, the company believes that some pressure on gross margins could show up. However, the company is confident of partly mitigating the same through operational efficiencies.

    Definitions of ratings

    BUY - We expect this stock to deliver more than 15% returns over the next 12 months.
    ADD - We expect this stock to deliver 5-15% returns over the next 12 months.
    REDUCE - We expect this stock to deliver -5-+5% returns over the next 12 months.
    SELL - We expect this stock to deliver

    Our target prices are also on a 12-month horizon basis.

    Other definitions

    Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.

    Other ratings/identifiers

    NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
    CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
    NC = Not Covered. Kotak Securities does not cover this company.
    RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
    NM = Not Meaningful. The information is not meaningful and is therefore excluded.

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