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    Buy Dabur, target Rs 485: Phillip Capital

    Synopsis

    Dabur India is a largecap company, operating in personal care sector.

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    The brokerage has set a one-year horizon for the stock to hit the target price.

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    Phillip Capital (India) has given a buy recommendation on Dabur India with a target price of Rs 485.

    Shares of Dabur India traded at Rs 420.05 around 2:55 pm on 22 July, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.

    June quarter highlights

    • Dabur results were significantly ahead of consensus estimates, as it was able to navigate challenges of rural distress and liquidity related issues for trade channels, much better than its peers.
    • Management highlighted its initiative of increased direct distribution reach, intensive focus on power brands (65-70 per cent of revenue) and revamp of supply chain infrastructure led to such strong outperformance.
    • Performance was broad-based across categories; however juices business continued to remain drag for fourth consecutive quarter.
    • Recovery in International business (30 per cent of sales) on back of strong growth in Turkey (41 per cent CC), stabilization of Middle East business and increasing share of high margin Non-USA (nearly 40 per cent now) for Namaste basket further gave momentum.
    • Ebitda growth (18.5 per cent YoY) was far ahead of our expectations due to improved product mix (higher salience of healthcare products), better geographical mix within international business and benefits of operating leverage kicking in management sounded caution despite delivering c10 per cent volume growth, as rural business (50 per cent of sales) has started decelerating from June,2019 onwards owing to liquidity crunch, deficient rainfall and muted consumer sentiment.
    • However, it reiterated its guidance of mid to high single digit volume growth and operating margin above 20 per cent in FY20, which the brokergae believes is quite commendable in relative context given other CPG companies are struggling to achieve the same.

    Investment rationale:

    Corrective action in place to revive Juices business
    Given increased competition from milk based beverage manufacturers, Dabur has launched differentiated masala range (Mixed fruit and Aam Panna) and mixed berries variant. It plans to penetrate in rural areas using Rs 10 (Real Koolerz) range, as juice being more of urban oriented category.

    Oral care continues to smile
    Market share gains (40bps), increasing preference towards natural products (15 per cent growth in Dabur Red) led to double digit volume growth. Babool, which was struggling on account of launches made by competitors in access packs, has been relaunched on ayurvedic platform at disruptive price point (30/100 gm).

    Health supplements was an outlier
    It grew 20 per cent on back of market share gains (about 100bps) in glucose category. Glucose saw strong growth owing to trade related disruption for key competitor (Kraft Heinz sold to Zydus) and launch of Mango variant.

    Hair care
    Double digit growth across VAHO portfolio; however coconut oil disappointed due to increased competitive intensity from Marico. Almond hair oil grew handsomely due to 50 per cent additional offer in Modern Trade.

    New Power brands
    Focus on Honitus (cough & cold), Pudin Hara (digestive) and Lal tail and will take other brand once each of the brand reach Rs 100 crore revenue potential.

    Diversified portfolio makes it immune from any unknown
    The brokergae believes Dabur’s diversified portfolio makes it fool-proof from any economic, regulatory and seasonality risks that other peers might have to tackle.

    As per the brokergae, management under the guidance of Mohit Malhotra is taking steps in right direction (focus on power brands, NPD and increased distribution reach) to drive growth in long term. Reduction in competitive intensity from Patanjali further should support the cause.

    "We maintain buy with a target price with of Rs 485 (45 times September -21) against 430 (40 times December -20 EPS).

    Discount-led competition by juice and oral care players to gain market share is the key risk, while any unfavorable factor that could hurt the growth of rural economy is another factor to watch out for, said the brokerage.
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    The Economic Times