FMCG major Dabur India's stock seems reasonably valued post correction

Dabur is expanding its premium portfolio and Total Addressable Market (TAM). The company estimates its existing portfolio, contributes less than 5 per cent of TAM

Analysts’ interactions with Mohit Malhotra, chief executive officer (CEO) of Dabur India (Dabur), give a clear picture of the demand trends in the fast-moving consumer goods (FMCG) space and the company’s strategy.

 

A recent stock correction has brought valuations to reasonable levels. Analysts seemed positive on the stock. 

 

The demand environment is unchanged compared to Q2FY25. Rural demand is slowly recovering, but urban demand is subdued.

 

Dabur made inventory corrections at the end of Q2FY25 to improve distributor return on investment (RoI), which had a significant impact on primary sales performance in Q2 (domestic revenue down 8 per cent).

 

The management expects gross margins to improve gradually. Its operating margin was 20 per cent pre-Covid but contracted in FY24 due to high raw material costs and increased brand investments.

 

Given a 2 per cent price hike, the company is confident about sustaining earnings before interest, taxes, depreciation and amortisation (Ebitda) margins at 19-20 per cent.

 

The portfolio of Chyawanprash, Honey, Honitus, and Lal Tail has seen modest growth due to the delayed winter.

 

The winter portfolio usually has 30-35 per cent revenue contribution in Q3 and an estimated 15 per cent contribution in FY25.

 

Primary revenue growth has normalised from October, with a price hike. 

 

The home and personal care (HPC) portfolio (over 50 per cent of revenue) has sustained, seeing single-digit growth, and the company is confident of high single-digit to low double-digit growth in the medium term. It will be driven by oral care, home care, and skin care.

 

The food business (30 per cent of food and beverages, including Badshah) is expected to sustain around 20-25 per cent compound annual growth rate (CAGR).

 

The beverage business was poor last season. The company expects a recovery.

 

Dabur is expanding its premium portfolio and total addressable market (TAM). The company sees its existing portfolio contributing less than 5 per cent of TAM. There has been initial success with new launches, but not yet at the desired scale.

 

The top-seven brands, which account for 70 per cent of revenue, are the key growth drivers. New products contribute 3-4 per cent of overall sales.

 

Recent launches in the baby care and health juices categories are expected to generate Rs 50 crore revenue each in FY25.

 

The skincare segment, along with extensions of the Gulabari brand (Shower Gel and Mist), could be scalable.

 

Dabur also looks to enhance its presence and expand footprint in modern trade and e-commerce channels. Emerging channels (Ecomm, QC and MT) contribute 24 per cent of overall business and 50 per cent of urban consumption.

 

The company is expanding its product basket in such channels.

 

The HPC portfolio (oral care, hair care, home care, and skin care) contributes 50 per cent of domestic revenue. Oral Care has consistently gained market share with Dabur leading in Odisha, Andhra Pradesh, and Tamil Nadu.

 

In toothpaste, there are gaps in whitening and sensitive segments, which Dabur aims to fill.

 

Dabur holds 17 per cent market share in oral care, and 30 per cent in herbal/natural. The oral care portfolio can deliver high single-digit to low double-digit growth. Home care has also been growing at a healthy pace.

 

The beverages business was poor last season, as price cuts on carbonated drinks created a significant price gap between juices and carbonated beverages.

 

The company implemented price reductions on large packs (20-25 per cent) and expanded its range in juices.

 

The healthcare drive is seeing slow initial success with Philip Haydon, former CEO of Himalaya, joining Dabur in 2023 to lead healthcare.

 

The international business (25 per cent of total sales) is expected to sustain healthy growth (13 per cent constant currency growth in Q3).

 

Sesa (Sesa Care Private Ltd) derives 20 per cent of sales from international markets.

 

Oral care and hair care have strong traction. Many markets are witnessing a shift to natural and herbal, which benefits Dabur.