CUSTODIAN OF AYURVEDA CMP as of Oc t 5, 2020 CMP (Rs) 520

Initiating Coverage

06th Oct 2020

BUY

Target Price

610

Dabur India

FMCG

1

CUSTODIAN OF AYURVEDA

We initiate coverage on Dabur India Ltd. (DABUR) with a BUY recommendation and a

Target Price of Rs. 610, which implies 17% upside from current levels. We expect DABUR

to register Revenue/EBITDA/PAT CAGR of 7%/11%/12% over FY20-23E driven by 1)

accelerated shift of consumers towards preventive/immunity boosting natural products; 2) market

leadership in Ayurvedic/naturals category (35% sales) a competitive edge; 3) aggressive NPD

launches across categories (NPDs contribution 6% in Q1FY21); 4) deepening distribution network

across geographies (RISE strategy) and channels (Project Buniyaad); 5) foray into fast growing

personal & home hygiene category; 6) healthy margins; and 7) strong balance sheet. At CMP,

stock trades at 44x its FY23E EPS which is fairly attractive (53x - 3 year avg PE). Backed by

robust growth of its power brands, strengthening ayurvedic roots and steadily improving margins

are factors that augur well over the long term. We assign a target multiple of 50x PE its FY23E

EPS to arrive at our target price.

OUR INVESTMENT THESIS IS BASED ON THE FOLLOWING PREMISES

Well-positioned to benefit from post-COVID consumer behavior

Outbreak of COVID pandemic has led to a surge in demand for Ayurvedic and Natural immunity boosting products leading to robust offtake for Dabur’s Chyawanprash and Honey (grown 7x & 60% resp in Q1FY21) where it is a category leader. Several new immunity-related products like Haldi drops, Giloy ras, Immunity kit etc were launched in contemporary formats to capture the demand rise. Dabur is also parternering with Govt agencies to boost consumption of ayurvedic/herbal products. We believe Dabur is well placed to capture this accelerated shift of consumers to preventive healthcare/immunity boosting products as it is a ‘custodian of ayurveda’. Ayurveda/ Herbal positioning – a huge moat

Indian Ayurvedic products market is expected to grow at 14% CAGR over 2019-24E, given surge in demand for natural/herbal products. Dabur’s positioning as a world leader in Ayurveda/Herbal space for over a century, strong R&D team, captive fields for medicinal herbs and large manufacturing capabilities gives it an edge over competitors. Dabur has strategized to invest and strengthen its power brands which mainly includes healthcare/OTC products. It has a healthy NPD in healthcare segment that forms ~35% of revenues. To support power brands growth, it aims to expand chemists coverage to 2.7 lakh outlets by FY21 (currently 2.4 lakh chemists).

Huge beneficiary of rural market’s resilience Q1FY21 Rural sales stood at 48% of revenues. With rural growing ahead of urban Dabur could be a huge beneficiary of this improving demand trend. Key drivers for rural growth are 1) better than expected monsoon; 2) Govt support through increased allocation to MGNREGA, DBT, free distribution of foodgrains etc; 3) reverse migration of labour driving higher share of LUPs thus aiding market share gains; and 4) higher MSPs. Region-specific innovations, reshaping go-to-market strategy, LUPs, increase A&P spends on niche categories and driving distribution penetration are key focus areas to drive growth. Dabur plans to enhance rural penetration by covering 60k villages (55k in FY20) by FY21 and drive direct reach.

Stepping up distribution reach and new product launches

Outbreak of the pandemic served as a catalyst for stepping up NPDs and bringing about agility and aggression across the business as Dabur launched 50+ new products in healthcare, food, home and personal care segment. This momentum is likley to continue in our view. In terms of distribution expansion, the company remains committed to reduce its wholesale channel dependence by growing direct reach majorly in rural areas to 1.5mn outlets (1.2mn in FY20) over next 2-3 years. Dabur’s total reach is of 6.7million outlets 3rd largest amongst FMCG peers.

AYURVEDIC IMMUNITY BOOSTER – INITIATE WITH BUY We value Dabur ar 50x FY23E EPS at a discount to its 3 year mean PE of 53x given its market leadership in Ayurvedic category, rich legacy, fearlessness in NPD launches, healthy margins and operating cash flows. We initiate coverage with a BUY rating and TP of Rs. 610/share

Key Financials (Consolidated)

(Rs. Cr) FY20 FY21E FY22E FY23E

Net Sales 8,677.6 8,840.7 9,671.5 10,708.6

EBITDA 1,792.4 1,874.1 2,134.3 2,456.3

Net Profit 1,548.0 1,621.8 1,860.5 2,150.9

EPS (Rs.) 8.8 9.2 10.5 12.2

PER (x) 59.4 56.7 49.4 42.7

EV/EBITDA (x) 51.1 48.3 41.8 35.9

P/BV (x) 10.5 10.2 9.2 8.2

ROE (%) 23.4 21.1 21.1 21.5

Debt/Equity (%) 7.1 6.1 5.3 4.7

Source: Company, Axis Research

CMP as of Oct 5, 2020

CMP (Rs) 520

Upside /Downside (%) 17%

High/Low (Rs) 528/ 385

Market cap (Cr) 86,974

Avg. daily vol. (6m) Shrs. 37,18,025

No. of shares (Cr) 176.7

Shareholding (%)

Dec-19 Mar-20 Jun-20

Promoter 67.9 67.9 67.9

FIIs 17.5 17.4 17.6

MFs / UTI 3.4 3.3 3.3

Banks / FIs 1.2 1.4 1.7

Others 10.1 10.0 9.5

Financial & Valuations

Y/E Mar (Rs. bn) 2021E 2022E 2023E

Net Sales 88.4 96.7 107.1

EBITDA 18.7 21.3 24.6

Net Profit 16.2 18.6 21.5

EPS (Rs.) 9.2 10.5 12.2

PER (x) 56.7 49.4 42.7

EV/EBITDA (x) 48.3 41.8 35.9

P/BV (x) 10.2 9.2 8.2

ROE (%) 21.1 21.1 21.5

Key Drivers (%)

Y/E Dec FY21E FY22E FY23E

Sales Growth 1.9 9.4 10.7

Gross Margin 50.0 50.4 50.9

EBITDA Margin 21.2 22.1 22.9

Axis Sec vs Consensus

EPS Estimates FY21E FY22E FY23E

Axis Sec 9.2 10.5 12.1

Consensus 9.3 10.7 12.2

Consensus (Mean) TP 516

Relative performance

Source: Capitaline, Axis Securities

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120

160

Oct-19 Mar-20 Sep-20

Dabur Sensex

Suvarna Joshi Sr. Research Analyst

Email: [email protected]

Tanvi Shetty Research Associate Email: [email protected]

2

Story in charts

Exhibit 1: Volumes to steadily grow over FY20-23E… Exhibit 2: …Resulting in a 7.3% Revenue CAGR over FY20-23E

Source: Company, Axis Securities Source: Company, Axis Securities

Exhibit 3: Gross Margin improvement aided by better product mix Exhibit 4: Project Samriddhi (cost savings) to support EBITDA Margins


Exhibit 5: Expect 12% PAT CAGR over FY20-23E Exhibit 6: Steady Return Ratios over FY20-23E


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2

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FY18 FY19 FY20 FY21E FY22E FY23E

Volume growth YoY (%)

7,723

8,505

8,678 8,841 9,671

10.708

0

2

4

6

8

10

12

-

2,000

4,000

6,000

8,000

10,000

12,000


Net Sales (Rs cr) Net Sales Growth YoY (%) (RHS)

50.2 49.3 49.8 50.0 50.4 50.9 0

5

10

15

48

49

50

51


Gross Margin (%) (LHS) Gross Profit Growth YoY (%) (RHS)

10.3 11.0 10.9 10.9 10.7 10.6

7.9 7.2 7.5 7.0 7.5 8.0

8.8 8.3 8.1 8.0 7.4 6.9

20.6 20.1 20.4 21.2 22.1 22.9

0

5

10

15

20

25


%

Employee Costs A&P SpendsOther Expenses EBITDA Margin

1,358

1,446 1,448

1,622

1,861

2,151

0

4

8

12

16

0

500

1,000

1,500

2,000

2,500


PAT (Rs. cr) PAT Growth YoY (%) (RHS)

24.0

27.0

23.4

21.1 21.1 21.5

22.0

24.0 23.5

21.2 21.3 21.7

10

20

30


ROE(%) ROCE(%)

3

Exhibit 7: Stable Working Capital Cycle over FY20-23E Exhibit 8: Healthy CFO/EBITDA coupled with low Debt: Equity


Exhibit 9: India Business Revenue breakup (FY20) Exhibit 10: Category wise Revenue breakup (FY20)


Exhibit 11: International biz geography wise revenue mix (FY20) Exhibit 12: India biz vertical wise revenue break up (FY20)


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20

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60

80


Debtor days Inventory days

Creditor days Working Capital Cycle days (RHS)

89%

108% 109% 99% 100% 98%

0%

20%

40%

60%

80%

100%

120%

0

500

1,000

1,500

2,000

2,500

3,000


CFO (Rs. cr) (LHS) CFO as a % of EBITDA (RHS) D/E (x) (RHS)

Consumer Care

Business 58%

International Business

28%

Food Business

11%

Others 3% Health

Supplements 19%

Digestives 6%

OTC & Ethicals

9%

Oral Care 17%

Foods 16%

Home Care 7%

Hair Care 21%

Skin Care 5%

Middle East 28%

Africa 23%

Asia 23%

Americas 14%

Europe 12%

HPC 50%

Health Care 34%

Food 16%

4

Key Investment Arguments

Well positioned to benefit from post COVID consumer behavior

Immunity boosting Healthcare products (37% revenues in Q1FY21) to lead....

Dabur has a rich legacy of Ayurveda and Natural healthcare with a portfolio of over 250 herbal/ayurvedic products. There is a renewed focus to

contemporize traditional ayurvedic knowledge with modern day science and develop mainstream products (and packaging formats) that are meant

for today's generation. The current pandemic has highlighted the importance and need for health and hygiene products and their benefits to an

individual’s health. And Dabur’s wide portfolio of immunity boosting products has received the much needed boost from a demand perspective.

Amidst this fast evolving environment, preventive healthcare is witnessing significant traction and this trend is likley to sustain going forward. Key

initiatives undertaken by Dabur are :-

1) Product portfolio expansion: The company introduced a new range of products under the immunity theme since outbreak of the pandemic.

Key launches included Tulsi Drops, Haldi Drops, Amla Juice, Giloy- Neem - Tulsi Juice, Ayush Kwath Kadha, Ashwagandha Capsules and

Tablets, Ayurvedic Churna range, Babay care range, variants in Dabur Honey and Chywanprash, Dabur Immunity Kit, variants in Dabur

Honitus etc. Chyanprash and Honey together contribute ~15-20% of Healthcare Revneues and Dabur has witnessed a surge in its market

share by 325bps in Chywanprash at 62% and 300bps in Honey further extending its leadership in Q1FY21. Dabur is conducting clinical trials

on Chyawanprash, in addition to prophylaxis studies on Ashwagandha and Giloy, specifically with respect to COVID-19. These studies are

expected to generate data to back the efficacy and effectiveness of this Ayurvedic remedy on preventing COVID-19 and also its effect on

recovery from COVID and reducing the severity of COVID infection.

Exhibit 13: Fast tracked NPDs in Healthcare segment to capitalize on the surging market demand

Source: Company, Axis Securities

2) Working with Government’s Ministry of AYUSH: Dabur is working with Government’s Ministry of AYUSH to help frame regulations,

introduce new formulations and products and thus popularize and make Ayurveda more mainstream. Management indicated that it is

conducting clinical trials on efficacy of Chywanprash, Ashwgandha, Giloy (natural immunity boosting properties) on COVID-19 in partnership

with Government.

3) Backward linkage: About 6,100 acres of land for key medicinal herbs is under cultivation with 8000+ farmers being engaged to cultivate the

same both in India and Nepal.

4) Doctor advocacy and engaging with consumer: To further capitalize on the naturals/ayurvedic trend the company has been focusing on

engaging with consumers by undertaking health camps, doctor meets and consumer samplings. Also, ayurvedic coverage has seen a steady

increase over the past 3-4 years to 60k vs 20k. Dabur has also taken initiatives to expand consumer touch points through Dabur Ayurved

Chikitsalayas (~650) and Dabur branded Ayurvedic stores to ~2500.

We believe that the company is well poised to leverage this shifting consumer behavior by revamping their healthcare portfolio, making

it more contemporary (convenient ready to use formats) and providing requisite investments behind improving consumer awareness.

Exhibit 14: Consistent surge in immunity boosting products Exhibit 15: Q1FY21 contribution of Healthcare products increases


0

50

100

150

200

250

300

Dec - Jan - Feb '20 Pre COVID - Mar '20 Lockdown - May '20 Unlock 1.0 - June'20

Chywanprash Honey

22

6 10

19 19

5 5

14 18

6 9

22

17

7 5

17

0

5

10

15

20

25

Q1FY21 (% of Total Revenues) FY19 (% of Total Revenues)

5

Ayurveda / Herbal positioning – a huge moat

Indian Ayurvedic market is expected to grow at 14% CAGR during 2019-24E with three Indian companies Dabur, Emami and Baidyanath

dominating the domestic ayurvedic market with an 85% market share as per a report by IMARC that was released prior to the COVID pandemic

spread. Key factors driving the Indian Ayurvedic products market are:-

1) Rising health concerns and awareness about the side-effects of western medicines is further driving the consumer preference for Ayurvedic

products.

2) Increasing popularity of natural and herbal medicines and their benefits among the consumers.

3) Sharper and accelerated resurgence in consumer preference and demand for ayurvedic medicines (preventive and immunity boosting) due to

spread of the COVID-19 pandemic.

4) Improved distribution network and infrastructure have led to increased accessibility of these products in both urban and rural areas.

The Ministry of Ayurveda, Yoga & Naturopathy, Unani, Siddha and Homoeopathy (AYUSH) Ministry’s recent list of measures to boost immunity

has led to surge in demand for natural immunity boosting products like chyawanprash and honey. Dabur has been has been a leader Ayurvedic

medicine and natural consumer products space for over a century.

The company’s rich legacy and consumers trust of being a ‘custodian of Ayurveda’ has been built over 136 years and is a huge moat

enjoyed by Dabur which is difficult to replicate. Besides, Dabur’s experience in the sector, its strong R&D team (~100

scientists/doctors), captive fields for medicinal herbs (over 6,100 acres of land under cultivation of rare herbs and medicinal plants in

India and Nepal), capabilities to produce at scale and sound management practices, credibility in the market place gives it an edge over

competitors.

Ayurveda continues to be the bedrock of Dabur’s expansion strategy as it has 20-30 products in the pipeline to be launched over the next 3-4

years, covering multiple sub-categories/ailments thereby strenthening its ayurveda/natural/herbal portfolio, which currently contributes ~35% to its

product basket (20-25% market share in branded ayurvedic market). It also aims to increase its reach of Ayurvedic products by increasing its

chemists touch points to 2.7 lakh outlets from 2.4 lakh at present (total chemist shops 5.0lakhs) which would increase the offtake of its OTC and

digestive segments. Dabur also wants to step up innovations so as to provide a one stop solution portfolio of ayurvedic products through

prescription route. For this purpose it has enhanced its doctor coverage from 48k to 59k in FY20. It also aims to connect with the millennial and

centennial generation by making Ayurveda more modern, and contemporary. Further govenrment’s support to the ayurvedic market and its new

vocal for local push alongwith provision of better infrastructure and lower tax rate could help Dabur grow its naturals portfolio over the longer run.

Exhibit 16: Focus on driving Doctor Advocacy by

growing coverage

Exhibit 17: Dabur’s competitive (naturals) position

across categories


Exhibit 18: Global appeal of Dabur’s Ayurvedic/Herbal brands Exhibit 19: Market leadership in key categories across geographies


35,000 42,000

59,288

0

25,000

50,000

75,000

FY18 FY19 FY20

Doctor Coverages

0

10

20

30

40

Honey chyawanprash Baby Massage

Oil

Glucose Hair Oils

Oral Care

Skin Care

Bleaches

Toilet Clean

Air Fresheners

Mosquito Repellent

Cream

Juices

#1 #1 #2 #2 #2 #3 #1 #2 #1 #1 #1

Leading position in key categories across verticals

6

Strategic focus on Power Brands to power up share gains

Dabur has one of the widest product portfolio with over 400 products and 1000+ SKUs. On the one hand it lowers dependence on any one

category, but on the other it becomes unweildy to manage such a large portfolio. Thus to sustain agility and bring in more efficiency across

products, the company has identified 9 power brands to focus on. These power brands contribute 70% revenues for the company. With an

invigorated focus on driving growth through disproportionate investments in these brands through marketing, innovations & NPDs and distribution

penetration. In a majority of these power brands Dabur is already a leader and thus management intends to grow the categories and increase its

presence and market share in some of the categories where it is either placed 2nd or 3rd largest player.

With most of the power brands falling in the healthcare segment the current trend of consumers seeking ayurvedic/natural preventive healthcare

remedies augur well for the power brands like Dabur Chyawanprash, Dabur Honey (Health supplements), Dabur Honitus (OTC & Ethicals), Dabur

Pudin Hara (Digestives). Management indicated that power brands like Honitus, Pudin Hara and Dabur Lal Tail (baby massage oils) each

have a Rs. 100cr revenue potential. Recently, Dabur launched a full range of baby care products as the baby care market in India posted

17% CAGR over the past three years driven by a large market (65mn children in India are below 2 years of age). This bodes well for

Dabur’s Lal Tail power brand and also the range of baby care products it launched. Further, the growth in these brands will lead to market

share gains for the company in the respective categories.

Exhibit 20: Power brands growth in FY19 Exhibit 21: Dabur Baby – launched under the baby care category


Power brand specific stragegies backed by aggressive brand investments (higher A&P spends), innovation, premiumization and distribution

expansion are expected to drive market share gains for the company from a medium to long term perspective. Pre-COVID all of Dabur’s power

brands reported healthy double-digit volume growth alongwith strengthening market share gain opportunities.

7

Exhibit 22: Power Brands powering growth in FY19

Power Brand Contemporize Ayurveda Strategy

62% market share currently Strengthen immunity positioning Extend usage beyond winters Enhance chemist reach and develop MT channel Build positioning in kids variant

Largest player in branded Honey segment Immunity boosting natural product Shift in usage from medicine cabinet to breakfast

table Strengthen fitness and healthy proposition Launch premium variants

Fortify proposition of an ayurvedic medicine Modernize formats (power fizz format) Connect with millennials through digital media

Leading player in the baby massage oil category Focus on market share gains Expand distribution footprint Launch range of baby care products

Reinforce ayurvedic positioning Launch convenient formats like Hot Sip & lozenges Launched variants like Dabur Honitus Adulsa syrup Focus is on growing market share Increase distribution

Market share gains from non-natural toothpastes Focus on low throughput markets Digitally connect with millennials Extend brand to premium formats Grow brand’s rural franchise through LUPs

Largest selling hair oil brand in the world Strengthen core brand by aggressive spends Add flanker brands (Bramhi Amla, Sarson Amla) Launch premium variants Improve accessibility

Vatika has large presence outside India Cross pollinate international portfolio in India Scale up Vatika franchise in India Launch new products and premium variants Extend distribution reach beyond South India

Increase consumption occasions Expansion in low throughput markets Premiumization in health based variants Enter fruit drink segments

Source: Company; Axis Securities

8

Home and Personal Care (HPC) (50% revenue) to see market share gains led growth

HPC segment contributes ~50% to domestic revneues for Dabur. Owing to COVID outbreak, the cleaning and home care solution industry in FY20

saw high single-digit growth given elevated awareness levels of maintaining health and hygiene. As a result consumers’ need for hygiene products

ranging from hand sanitisers to household disinfectants shot up sharply to 3x YoY as per Nielsen India. These heightened demand is likely to

sustain over the medium term untill the scare and fear of the COVID-19 virus is behind us. Indian personal hygiene market (hand wash, hand

sanitizer etc.) is expected to reach US$ 15billion by 2023 with the hand sanitizer market touching a market value of Rs. 12,000cr from Rs. 100cr

pre-COVID. To bank on this evident high growth phase thrown upon by the pandemic Dabur aggressively launched products, like Disinfectant

Spray, Dabur Sanitize Hand sanitizer, Dazzle cleaning solutions, Veggie Wash, Suraksha Kit, Fem Hand Wash etc to name a few. However, Skin

Care and Har Care segments witnessed de-growth in Q1FY21 owing to their discretionary nature and possible downtrading to value/economy

products.

However, in the Oral Care category Dabur Red Toothpaste continued its outperformance growing nearly 2x the category growth driven by its

naturals/ayurveda positioning. In its efforts to offer value packs to its consumers given their shift to LUP during the slowdown, Dabur was

aggressive in launching and distributing its low-priced unit play by offering a Rs. 10/pack for the flagship Dabur Red Toothpaste brand. To fill gaps

in the product offering, Dabur launched Dant Rakshak at Rs. 40 price point to compete with Patanjali’s Dant Kanti (competition intensity

decreasing). We thus expect its oral care segment which is highly penetrated to perform well going ahead backed by market share gains as

witnessed in Q1FY21 where in the Toothpaste segment Dabur gained 60bps share at mid-teens and growing steadily. In Hair Care segment given

its discretionary nature which impacted sales, Dabur reported market share gains of ~40bps in perfumed Hair Oils and ~120bps in Shampoo

category. Odomos and Odonil in personal/home care space has seen +250bps market share gains despite being a discretionary product.

Exhibit 23: Share gains to drive growth in HPC category in India Exhibit 24: New Product launched in Personal Care segment


Exhibit 25: New Product launched in Home cleaning and Personal care space in India


Foods segment (16% of total revenues) – structural penetration led growth opportunity

Even before the COVID Dabur’s growth in juices segment was lagging as consumers downtraded to cheaper alternatives like fruit based

drinks/carbonated drinks/milk based healthy drinks. Lockdown induced by the pandemic further hit this segment as out of home consumption (~25-

30% of Real juice sales) was adversely impacted. Despite this Dabur continued to gain market share indicating preference for branded and

trusted products. Dabur also launched Real in PET bottles to drive in-home consumption highligting its health orientation. While, the pandemic led

pain is a near term headwind we believe, there remain structural long term opportunities in the overall beverage market which has an estimated

size of Rs. 88,200cr of which ~85% is organized. Pre-COVID the juices/healthy beverage market was growing at 10-15% rate annually. This bodes

well for Dabur’s widespread juice portfolio under the brands Real and Real Activ. Real is the leader in the juices segment despite competition from

brands of ITC, Pepsi. Coca-Cola and Hector beverages and has a share of 62%. Also, given pressure on consumption spends, Dabur introduced a

Rs. 10 pack of fruit beverage under the Real Koolerz brand to tap into the low-priced drinks segment ( Rs. 570cr market size). While, HoReCa

segment (10-15% revenues) was severely impacted, gradual easing of lockdown and permits to operates restaurants and bars will lead to an

improvement in this segment sales.

9

Exhibit 26: New Product launched in Food – Beverage and Culinary category


Overseas revenue (28% of consolidated revenues) to witness near-term headwinds

International operations account for 28% of consolidated revenues. Dabur Vatika is the power brand for overseas markets. Management expects

near term headwinds to keep international sales flat going ahead as MENA, which has the largest contribution at 40% of overseas revenues and

even higher share of produts (highest margin geography) continues to have crude linked macro headwinds along with migration of expats. US and

Sub-Saharan Africa who are the market leader in relaxers could clock positive growth given huge penetration opportunity. In countries like Egypt

(market leader), Greece and Bangladesh are likley to report modest growth, while Nepal sales to decline in high single-digits due to lockdowns.

Exhibit 27: International Ops facing headwinds – esp in MENA Exhibit 28: Dabur’s positioning internationally across categories

Category Saudi Arabia

Egypt UAE Nigeria Morocco Algeria US

Hair Oil # 1 # 1 # 2 - # 1 # 1 -

Hair Cream # 1 # 1 # 1 - # 1 # 1 -

Hair Gel # 1 # 2 # 1 - - - -

Hair Mask # 1 # 1 # 1 - - - -

Hair Serums # 3 # 3 # 2 - - - -

Shampoo # 6 # 6 # 5 - - - -

Leave-on # 6 - # 3 - - - -

Hair Color - - # 5 - - - -

Toothpaste # 5 # 4 # 4 # 3 # 3 # 3 -

Depilatories #3 - # 3 - - - -

Relaxers - - - - - - # 1


Huge beneficiary of rural market’s resilience

Rural markets contributed to nearly half of Dabur’s overall sales (~48% in Q1FY21). With rural market comparatively less impacted by the

pandemic, further fiscal measures announced by the government towards MNERGA initiatives in rural regions, migration of labour towards rural

areas,MSP increases for Kharif and Rabi 2020 season and normal monsoon forecast has led rural market to grow faster than urban in Q1FY21

(1% growth vs 13% de-growth) and we expect this trend to continue for the rest of the year barring some states like Bihar, MP and North East

region which had been impacted by floods and lockdowns. Dabur is well placed to capture this revival in rural demand backed by its distribution

expansion in villages which is largely underpenetrated as there are 6lakh villages in India out of which it targets to cover about 60k by end of

FY21E (current 55k village) thus indicating huge potential. These villages are served by 12,650 sub-stockists and 394 super stockists that operate

as the hubs and spokes for Dabur’s distribution in Rural regions.

Dabur has the right to win driven by its rural specific approach which includes a) cluster based distribution and direct village coverage; b) channel

specific innovations; c) investing in pushing low-unit-price (LUPs) in rural regions to capture rural demand. In order protect its market share from

Patanjali, Dabur reshaped its go-to-market strategy, improved rural coverage and increased A&P spend on niche categories and brands like

Hajmola, Chyawanprash, Glucose, Red Toothpaste and Babool etc. The LUP strategy helped penetration & volume growth, as LUP forms one-

third of sales in villages, it also acts as a trial activity for first-time users of the product. Thus led to higher contribution (45-50% to its sales) of sales

from rural vs peers in the consumer space. We expect rural markets to sustain is growth ahead of urban in the near to medium term.

Middle East 28%

Africa 23%

Asia 23%

Americas 14%

Europe 12%

10

Exhibit 29: Rural focused LUPs to drive volumes/market share growth Exhibit 30: Consistent increase in village coverage to penetrate further

z


Project RISE (Regional Insights and Speed in Execution), an analytics based project was rolled out by Dabur for capturing regional market

opportunities. The programme identified 12 geographical clusters and three channel clusters that could turn into consumer demand generating

regions. A test run was launched in North East which garnered positive results as recorded in the 25% growth coming from the North East region.

As part of the strategy, Dabur has built the necessary infrastructure, hired sales and service managers (SSMs), appointed sub-stockists, tied up

with local celebrities and partnered with local newspapers to spread awareness for its products resulting in positive growth. Dabur has replicated

this strategy in South India which now contributes to ~15-16% to the overall business as compared to 25-30% for other FMCG players.

Exhibit 31: RISE Initiatives in North East Exhibit 32: RISE initiatives in South India


Stepping up NPD launches – momentum to continue

Q1FY21, clearly highlighted a cultural change at Dabur India with a reinvigorated team under Mr. Mohit Malhotra, currently CEO at Dabur. While,

Innovation and Renovation have been critical for Dabur’s performance the same has received the much needed push at Dabur over the recent

months. As of Q1FY21, ~50+ new products were launched (~40 products launched over 3 months since the lockdown). The NPD cycle time has

drastically reduced to ~2 months as compared to 1.5 years earlier owing to enhanced spends on R&D. Further Dabur management now

has a lower threshold to benchmark success of a new product vs the past allowing more aggressive approach on NPD front. E-Commerce

distribution channel is increasingly being leveraged to explore new product acceptance. Revenue share of new products in Q1FY21 was at an

all-time high at 5.6% of revenue vs 1.5% earlier although it may come off, still it would be higher to the earlier levels. We expect, NPD

share to rise to ~5-6% on a more sustainable basis as compared to 2-3% earlier. There are plans to launch new formats for Chyawanprash,

herbal tea, and food products. Packaging formats will also undergo renovation to provide a better connect with new age consumers.

Exhibit 33: Innovation & Renovations


41,473 44,068

55,000 60,000

0

20,000

40,000

60,000

80,000

FY18 FY19 FY20 FY21E

No

. o

f villa

ges

11

Exhibit 34: Entering new product segments – Domestic Business Exhibit 35: Entering new product segments – International Business


Dabur’s strong distribution network to aid growth

Dabur has been fairly successful in expanding its rural reach as against its peers in the FMCG space driven by various initiatives such as Project

Buniyaad. Dabur has higher rural salience as rural regions generate 48% of its revenues. Its rural direct network increased owing to its strategy of

growing in a hub and spoke model whith stockists as the hub and sub-stockist as its spokes. Dabur has the 3rd largest distribution network in the

FMCG space with a total coverage universe of 6.7million outlets out of which 1.2 million outlets are directly covered by the company. During the

pandemic with supply and distribution chains being disrupted, Dabur secured partnerships with alternative channels like Udaan, Delhivery and

Jumbotail while it reached out directly to its consumers by forging tie-ups with delivery partners like Flipkart, Amazon, Dunzo, Big Basket and

Swiggy. We believe, salience of e-commerce is here to stay as social distancing and minimum visits continue to be followed by consumers.

Besides, increasing its direct reach it also looks to enhance its chemist channel network which were allowed to operate through the lockdown

period given the essential nature of products sold. Modern Trade and CSD channel continues to be impacted owing the the pandemic. Recently

the company launched its own ‘Dabur Retail’ app for retailers to place their orders directly; the app has already got a customer base of 40K

retailers.

Exhibit 36: 3rd largest distribution network amongst the FMCG peers at

6.7mn outlets as of FY20

Exhibit 37: Direct coverage to reach 1.5mn outlets in 2-3 years to

reduce dependence on wholesale channel


Exhibit 38: e-commerce – Dabur’s salience rising as consumers seek

convenience of ordering online

Exhibit 39: e-commerce only exclusive premium products launched by

Dabur as millennial preference to shop is online


5.3

5.8 6.0

6.3

6.7 6.7

4.0

4.5

5.0

5.5

6.0

6.5

7.0

FY15 FY16 FY17 FY18 FY19 FY20

Ou

tlets

in

millio

n

0.92 0.91 0.91 1.02 1.10

1.20

1.50

0.0

0.5

1.0

1.5

2.0

FY15 FY16 FY17 FY18 FY19 FY20 FY23E

Ou

tlets

in

millio

n

1.3%

3.0%

5.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

FY19 FY20 Q1FY21

12

Margin outlook favorable supported by threadbare focus on costs

We believe pandemic outbreak has caused companies across the board to be ruthless with costs and Dabur too is no different. There has been a

signigicant step up in keeping srict tabs on costs and take a sharp look at optimizing spends (reinvesting most of the cost savings to accelerate

topline growth). Covid-19 disruption has further accelerated many of the ongoing initiatives, apart from forcing the company to relook at SKUs

rationalization, net revenue management (balance between pricing, consumer/trade promotions), automation across functions, enhance employee

productivity, optimize distribution costs, targetted A&P spends (retooling media mix). We note many of these efforts will result in structural cost

savings from a medium term perspective. In addition to this, the company also hired external consultants to relook at cost items and under Prokect

Samriddhi Dabur would look to juice out Rs. 100-120cr as cost savings. Of this management expects to save ~Rs. 40cr in FY21E. Management

indicated that much of the cost savings will be reinvested in AP to support its power brand strategy and invest behind its brands. Within A&P as

digital has emerged as an important medium the company will look to re-categorize it’s A&P spends without losing share of voice in traditional

media.

Given the above measures undertaken, expect a favourable margin outlook for Dabur over FY20-23E supported by improving product mix in

favour of higher contribution of high margin healthcare products, cost saving measures and operating leverage even as A&P spends rise to

support product innovations/renovations.

Exhibit 40: Steadily improving Margins


Working capital cycle to see an improvement over FY20-23E

Since COVID onset, company has witnessed pipeline correction and inventory levels at distributor end are at 16 days currently (vs 21 days earlier).

Management mentioned of significant scope to correct inventory level by 4-5 more days but at the same time improving SKU and stockist level

availability. Company plans to keep primary sales largely in line with secondary growth going ahead. As a result we expect the working capital

cycle to see an improvement albeit gradually to a net 25 days in FY23E from 29 days in FY20.

Exhibit 41: Working Capital cycle steady improvement


50.2 49.3 49.8 50.0 50.4 50.9

20.6 20.1 20.4 21.2 22.1 22.9

17.8 17.9 17.8 18.3 19.2 20.1

0

10

20

30

40

50

60


Gross Margin (%) EBITDA Margin (%) PAT Margin (%)

0

5

10

15

20

25

30

35

0

10

20

30

40

50

60

70


Debtor days Inventory days Creditor days Working Capital Cycle days (RHS)

13

Valuations and Outlook

We initiate coverage on Dabur India Ltd with BUY and Target Price of Rs. 610/share implying an upside of 17% as we value the stock at

50x P/E its FY23E EPS (3 year average P/E of 53x) which is reasonable as Dabur’s strategic initiatives toward an accelerated pace of

innovation/renovation (open to more experimentation, newer formats/variants to explore adjacencies, contemporary formats to appeal to the

younger population and improve urban appeal), premiumization, disproportionate investments behind 9 power brands (70% of domestic revenues),

distribution expansion (sgtregthen rural presence, benefits of RISE program, scale up of e-com & MT scale-up) and bringing operational efficiency

(supply chain, cost rationalization, use of technology, data and analytics) should enable the company navigate through the uncertain demand

environment better and report outperformance vs most peers in terms of revenue growth. With rural growth being ahead of urban Dabur stands to

gain given higher rural salience. International performance (Mid East particularly) could be challenged in the short term on account of subdued

macro (crude linked economy). Further, outbreak of the pandemic could act as an inflection point for the company in 1) accelerating consumers

shift to preventive healthcare and immunity boosting products where Dabur has a significant presence, 2) transformation from being fearful to

fearless in NPD launches, execution agility, cost consciousness, enhance technology & analytics data and we remain believers in DABUR’s

positioning as a ‘custodian of ayurveda’ for over 136 years and therefore initiate coverage with BUY rating.

Exhibit 42: 12M FWD PE CHART (x) Exhibit 43: 12M FWD PE BAND CHART


Exhibit 44: 12M FWD EV/EBITDA BAND Exhibit 45: Dabur India a consistent return generator

Time

Period DABUR

(P/E) Stock

Returns (%)

1 year 57.7x 12%

3 year 53.1x 17%

5 year 48.2x 12%

7 year 46.5x 17%

10 year 42.5x 17%


0

200

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600

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Price 20x 30x 40x 50x

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55

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p-1

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r-1

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p-1

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r-2

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p-2

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PE Mean Mean+1Stdev Mean-1Stdev

0

20000

40000

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80000

100000

120000

Mar-

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16

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-16

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EV 20x 30x 40x 50x

14

Key Risks

Sharper than expected volume de-growth

While, the unlocking guidelines have been progressively eased to support economic growth and streamline supply chains, a sharper than

expected deceleration in volumes across key categories in which Dabur operates could pose risk to our earnings estimates.

Increased competitive intensity

Given the surge in demand for health and hygiene products across personal and home care segments has led to many new and existing

companies to launch products thereby intensifying competition. Further, risk of disruptive pricing by competition in key categories of Dabur could

impact its performance in the near term.

Failure of new product launches

Outbreak of the pandemic was a catalyst in accelerating NPD launches. While, NPD contribution in Q1FY21 stood at 5% with an expectation of

this improving. However, failure of new product launches across categories, variants, SKUs and adjacencies could affect the revenue growth of

the company and also result in launching fewer products thus slowing down growth versus our expectations.

Volatile currency

Overseas operations contribute to 28% of FY20 revenues for the company. Dabur operates across the Middle East, Africa, Asia, Americas and

Europe thus exposing it to volatility in currency across geographies. Further any economic slowdown in these geographies could add to the

downside risks to Dabur’s international operations.

About the company

Dabur India started operations in 1884 as an Ayurvedic medicines company. The company has a rich legacy and ayurvedic heritage of over 136

years and is today the 4th largest FMCG company in India. Dabur India is also the world leader in Ayurveda with a portfolio of over 250

herbal/ayurvedic products. The company operates in key consumer product categories like Health Care, Hair Care, Oral Care, Skin Care, Home

Care and Foods. The company’s products have a huge presence in the Middle East, SAARC countries, Africa, USA, Europe and Russia.

International operations contribute to nearly 28% of its total revenues. Dabur is the master brand for Natural Healthcare products, Hajmola for

Digestives, Réal for Fruit Juices and Beverages, Vatika for premium Personal Care and Fem for Fairness Bleaches and Skin Care products.

The company markets its products under brands including Dabur Chywanprash, Dabur Honey, Dabur Baby, Vatika, Hajmola, Dabur Amla, Fem

and Dabur Red Toothpaste. The company has amongst the 2nd highest distribution network with nearly 6.7 million outlets across the country

with penetration across urban and rural markets. Promoters of Dabur, the Burmans were among the 1st business families to separate ownership

from management with handing over the managing of business affairs to professionals in 1998.

Exhibit 46: Dabur’s key brands in domestic and international markets Exhibit 47: Key pillars for growth at Dabur


Exhibit 48: Manufacturing footprint in India across 12 locations Exhibit 49: International manufacturing footprint across 8 geographies


15

Financials (Consolidated)

Profit & Loss (Rs Cr)

Y/E Dec FY20 FY21E FY22E FY23E

Net sales 8,678 8,841 9,671 10,709

Growth, % 2.0 1.9 9.4 10.7

Other income 26 0 0 0

Total income 8704 8841 9671 10709

Raw material expenses -4360 -4419 -4800 -5258

Other Operating expenses -2551 -2548 -2738 -2994

EBITDA (Core) 1792 1874 2134 2456

Growth, % 3.0 4.6 13.9 15.1

Margin, % 20.7 21.2 22.1 22.9

Depreciation -220 -230 -238 -250

EBIT 1572 1644 1897 2207

Growth, % 0.6 4.6 15.3 16.4

Margin, % 18.1 18.6 19.6 20.6

Interest paid -50 -26 -26 -26

Other Non-Operating Income 305 296 326 358

Pre-tax profit 1828 1915 2197 2539

Tax provided -280 -293 -336 -389

Profit after tax 1548 1622 1861 2151

Net Profit 1548 1622 1861 2151

Growth, % 1.8 4.8 14.7 15.6

Net Profit (adjusted) 1548 1622 1861 2151

Unadj. shares (m) 176.7 176.7 176.7 176.7


Balance Sheet (Rs Cr)

As at 31st Dec FY20 FY21E FY22E FY23E

Cash & bank 811 1,912 3,065 4,259

Debtors 814 824 874 939

Inventory 1,380 1,405 1,484 1,614

Loans & advances 1,150 1,150 1,150 1,150

Total current assets 4,155 5,290 6,573 7,962

Investments 2,800 2,800 2,800 2,800

Gross fixed assets 3,629 3,829 4,029 4,229

Less: Depreciation -1,377 -1,607 -1,844 -2,094

Add: Capital WIP 147 147 147 147

Net fixed assets 2,399 2,369 2,332 2,282

Total assets 9,354 10,460 11,705 13,044

Current liabilities 2181 2200 2329 2485

Total current liabilities 2181 2200 2329 2485

Non-current liabilities 531 531 531 531

Total liabilities 2712 2731 2860 3016

Paid-up capital 177 177 177 177

Reserves & surplus 6429 7516 8632 9815

Shareholders’ equity 6642 7729 8845 10028

Total equity & liabilities 9354 10460 11705 13044


16

Cash Flow (Rs Cr)

Y/E Dec, Rs. Cr FY20 FY21E FY22E FY23E

Pre-tax profit 1,828 1,915 2,197 2,539

Depreciation 220 230 238 250

Chg in working capital -631 -16 -1 -38

Total tax paid -280 -293 -336 -389

Other operating activities 0 0 0 0

Cash flow from operating activities 1,138 1,836 2,098 2,362

Capital expenditure -587 -200 -200 -200

Chg in investments 559 0 0 0

Cash flow from investing activities -28 -200 -200 -200

Free cash flow 1,109 1,636 1,898 2,162

Equity raised/(repaid) 165 0 0 0

Debt raised/(repaid) -57 0 0 0

Dividend (incl. tax) -1,949 -230 -625 -840

Cash flow from financing activities -1,835 -230 -625 -840

Net chg in cash -726 1,406 1,273 1,322


Ratio Analysis (%)

FY20 FY21E FY22E FY23E

Per Share data

EPS (INR) 8.8 9.2 10.5 12.2

Growth, % 1.7 4.8 14.7 15.6

Book NAV/share (INR) 37.4 43.5 49.8 56.5

FDEPS (INR) 8.8 9.2 10.5 12.2

CEPS (INR) 10.0 10.5 11.9 13.6

CFPS (INR) 4.7 8.7 10.0 11.3

DPS (INR) 9.1 1.3 3.5 4.8

Return ratios

Return on assets (%) 17.7 16.5 16.9 17.5

Return on equity (%) 23.4 21.1 21.1 21.5

Return on capital employed (%) 23.5 21.2 21.3 21.7

Turnover ratios

Asset turnover (x) 2.9 2.5 2.8 3.1

Sales/Total assets (x) 1.0 0.9 0.9 0.9

Sales/Net FA (x) 3.9 3.7 4.1 4.6

Working capital/Sales (x) 0.1 0.1 0.1 0.1

Receivable days 34.2 34.0 33.0 32.0

Inventory days 58.0 58.0 56.0 55.0

Payable days 78.3 78.7 79.0 79.0

Working capital days 48.9 48.7 44.5 41.5

Liquidity ratios

Current ratio (x) 1.9 2.4 2.8 3.2

Quick ratio (x) 1.3 1.8 2.2 2.6

Interest cover (x) 31.7 64.0 73.8 85.9

Dividend cover (x)

Total debt/Equity (%) 7.1 6.1 5.3 4.7

Net debt/Equity (%) (5.2) (18.8) (29.5) (38.0)

Valuation

PER (x) 59.4 56.7 49.4 42.7

PEG (x) - y-o-y growth 33.9 11.9 3.4 2.7

Price/Book (x) 13.9 11.9 10.4 9.2

EV/Net sales (x) 10.5 10.2 9.2 8.2

EV/EBITDA (x) 51.1 48.3 41.8 35.9

EV/EBIT (x) 58.2 55.0 47.1 39.9


17

About the analyst

Analyst: Suvarna Joshi

Contact Details: [email protected]

Sector: FMCG, Consumption sector, Sp. Chemicals, Mid-Caps

Analyst Bio: Suvarna Joshi is MBA (Finance) from Mumbai University with about 10 years of experience in

Equity market and research.

About the analyst

Analyst: Tanvi Shetty

Contact Details: [email protected]

Sector: Consumer Sector

Analyst Bio: Tanvi Shetty is MBA (Finance) from Chetana’s Institute of Management & Research with over 3

years of equity research experience.

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18

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HOLD Between 10% and -10%

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Documents

CUSTODIAN OF AYURVEDA CMP as of Oc t 5, 2020 CMP (Rs) 520