Dabur leans on 'Power of 8' to beat slowdown, sustain medium-term growth

Upward thrust to Ayurveda products with strong push to eight of its power brands and a structurally strong rural presence should help, say analysts

Dabur’s analyst meet, on Friday last week, underlined the continued consumption slowdown mainly in the hinterland. Factors such as liquidity crunch and lower rural wages are dampening consumer sentiment. After drifting down from 9.9 per cent in March 2019 quarter to 6.2 per cent in June 2019 quarter (Q1), volume growth in the FMCG sector decelerated further to 3.7 per cent in July 2019, shows Dabur’s presentation.

This indicates the near-term growth challenges many FMCG companies, including Dabur, are facing. Hindustan Unilever, Dabur, Emami, Bajaj Corporation, Colgate, Britannia, among others have 30-50 per cent revenues coming from rural markets. Though Dabur has 45-48 per cent rural exposure, the company’s medium-term growth potential looks intact. This would be on the back of Dabur’s upward thrust to Ayurveda products with strong push to its eight power brands and distribution expansion, as highlighted during the analyst meet.

According to analysts at IIFL, “While near-term growth may remain subdued due to an overall consumption slowdown, Dabur’s initiatives will enable it to grow faster than peers over the medium term.”

Dabur has identified eight power brands (65 per cent of its sales) – Dabur Chyawanprash, Dabur Honey, Dabur Lal Tail, Dabur Honitus, Dabur Pudin Hara, Dabur Red Paste, Dabur Amla hair oil and Dabur Real fruit juice – and it is making extra investments into these brands. For instance, the company sharply increased advertising or media spends for the power brands by 20 per cent against just a 6 per cent increase for its overall domestic business. This would further be supported by the management’s aim to make Dabur’s brands relevant to youth and millennial population through new packaging, new formats, communication, marketing mix, etc.

Analysts believe the company’s strategy to channelize its investments into specific categories would help spur overall growth over the medium term given the market share of its brands, growth headroom amid lower penetration and the government’s encouragement for use of Ayurvedic products through the Ministry of Ayush. Dabur also has a tie-up with the ministry. In FY19, too, these brands had clocked high single-digit to double-digit growth.

Another key growth lever for Dabur is its structurally strong distribution network even in rural areas. Dabur, as of March 2019, has 6.7 million outlets, one of the highest in the sector and it plans to increase its direct reach by 100,000 to 1.2 million by FY20.

Notably, the company has presence in over 48,000 of the around 66,000 villages, which account for 50 per cent share in overall FMCG rural demand. Dabur aims to increase this count to 55,000 by FY20. Nitin Gupta, analyst at SBICAP Securities says, the strong footing in high demand-generating rural areas should support the overall volume growth even in the ensuing quarters.

In fact, this is also visible in Dabur’s 9.6 per cent volume growth in Q1 at a time when most FMCG majors had reported slower growth in volumes due to demand moderation. This also helped gain investor trust with the share price of Dabur rising 9.4 per cent in the last two months against a 1.6 per cent decline in the Nifty FMCG index.

Having said that, the stock is already factoring in much of the above mentioned factors and is currently trading at 41 times its FY21 estimated earnings (21 per cent premium to its historical 5-year average of one-year forward estimates). Any disappointment on these fronts may not be taken lightly by investors.