Is it a Good Time to Buy DABUR ? (NSE: DABUR)

Dabur India Ltd is a market leader in Ayurveda and natural healthcare and amongst the top 4 FMCG companies in India. The company was established in 1884 and has a market presence of 13+ decades. Dabur operates some well-known brands like Dabur Honey, Dabur Chyawanprash, Real Fruit Juice, Honitus, Pudin Hara, Hajmola, Vatica, Red Paste, etc which has a high top of the mind recall amongst its consumers. The company’s shares have a 52-week price band of INR 525-357 and have a total market capitalization of INR 767 billion, which makes it a Large-Cap Company. The shares have a P/E of 49.3 and a dividend yield of 0.68%.

Ticker (NSE: DABUR)

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Now, let’s take a deep dive into the fundamentals of the company.

The company will be evaluated on 10 categories and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The categories are as follows.

• Economic Moat
• Business Model and Management
• Growth Ratios
• Profitability Ratios
• Cash Flow Ratios
• Liquidity and Solvency Ratios
• Efficiency Ratios
• Valuation Ratios
• ROE (Du Pont Analysis)
• Future Prospects

(All units are INR Millions except ratios and per share data)

1. Economic Moat (★ ★ ★ ★ ☆)

The company operates in the FMCG sector and market dominance in such an industry is obtained through Scale, Branding and Distribution reach. The scale of the business is such that the company has 250+ well-known brands and a market reach to 100+ countries in the world. Dabur Honey, Chyawanprash, Odomos, Odonil, Fem and Gulabari are No.1 brands in their respective category. Dabur Glucose-D, Lal Tail, Amla, Vatica and Anmol are No.2 brands in their category and Dabur red paste, Meswak and Babool are No.3 toothpaste brands in India.

The company has 20 world-class manufacturing facilities and distribution reach to 6.7+ million outlets in the world. It is also focused on widening its reach with the help of direct distribution and E-commerce. Currently, Dabur has 1.2+ Million Direct outlets and 6+ E-commerce partners which includes Flipkart, Amazon, Big Basket, Net Meds, 1mg and Grofers. For Dabur and its brands, the normal distribution network has a brand saliency of 15% and E-commerce has a brand saliency of 2.5%. (Brand Salience is the degree to which a brand is thought about or noticed when a customer is in a buying situation. Strong brands have high Brand Salience and weak brands have little or none)

Overall the company has a large scale, solid branding and a wide distribution network which strengthens its economic moat. Therefore this category gets 4 stars in Dabur fundamental analysis.

2. Business Model and Management (★ ★ ★ ★ ☆)

The business model for the company is such that the domestic contribution of revenue is 73% and International business from 100+ countries contributes the remaining 27%. Overall the healthcare business contributes 32%, Home and personal care contribute around 50% and Foods business contributes 18% to the total revenue. The Brands which have the largest revenue share includes Dabur Honey, Chyawanprash and Glucose-D which together contributes 17.6% and Dabur Amla, Vatika and Anmol which combined contributes 21.6% to the total revenue.

The company has 16+ brands with a turnover of INR 1+ billion and 3+ brands with a turnover of INR 10+ billion. The brands Real Fruit Juice, Dabur Amla Hair Oil and Dabur Vatica are in INR 10+ billion categories. The International Business comprises both the Organic and Acquired business. Organic business (67% of international) is an extension of the Indian portfolio with the same personal care brands operating internationally. Acquired business (32% of international) comprises Turkey’s Hobi group and the US-based Namaste Group’s brands. Overall the business model is well diversified and the focus is on core growth.

Mr Mohit Malhotra is the Chief Executive Officer and had joined Dabur in 1994 as a Management Trainee. Mr Amit Burman is the Chairman of the company and represents the promoter’s interest. The board also has a significant presence of closely related individuals of the promoter’s family including Mr Amit, Mohit, Aditya and Saket Burman. This can result in a potential principal-agent conflict in the future. Therefore this category gets 4 stars in Dabur fundamental analysis.

3. Growth Ratios (★ ★ ★ ★ ★)

The revenue has seen a CAGR growth of 9.6% in the last 10 years. The operating income and net income has also grown at a rate of 10.5% and 11.4% CAGR respectively during the same period. This indicates improving efficiency due to the economies of scale for the company. The working capital has remained flat but positive and the Cap-Ex also indicates a predictable linear growth for the company. Therefore this category gets 5 stars in Dabur fundamental analysis.

4. Profitability Ratios (★ ★ ★ ★ ★)

The gross margin has shown a slight decline in recent years, this is due to the inflation-related costs and indicates that the company is not able to pass this down to its consumers. This is the nature of the FMCG business. The other margins along with RoA have shown steady improvement over the years. Therefore this category gets 5 stars in Dabur fundamental analysis.

5. Cash Flow Ratios (★ ★ ★ ★ ★)

The net income margin has slightly improved and the Cap-Ex as a percentage of Sales has declined. This indicates a linear and moderate upcoming growth for the company. The free cash flow as a percentage of net income is also high and stable. The operating and free cash flow growth rate has also turned positive last year. Overall this indicates a good cash flow position for the company. Therefore this category gets 5 stars in Dabur fundamental analysis.

6. Liquidity and Solvency Ratios (★ ★ ★ ★ ★)

The financial leverage is going down along with the debt to equity ratio for the company. The profitability margins are also improving, which overall means an improved solvency position of the company. The current ratio along with the quick ratio has also been stable over the years. This indicates a surplus of current assets over current liabilities and a good cash and receivables position for the company. Therefore this category gets 5 stars in Dabur fundamental analysis.

7. Efficiency Ratios (★ ★ ★ ★ ☆)

The table in the excel model is color formatted so the worst performance over the period is highlighted in red color and the best performance is highlighted by green.

Overall the business efficiency has improved considerably over the last 10 years. The inventory days have only gone up slightly whereas the payable period has increased from 80 days to 131 days. The receivable days have also declined from 14 days to 10 days, due to increased focus on direct distribution and e-commerce. Overall the cash conversion cycle has gone down from 60 days to 22 days, but it still remains positive. Therefore this category gets 4 stars in Dabur fundamental analysis.

8. Valuation Ratios (★ ★ ★ ★ ★)

The company operates in FMCG business which is characterized by linear growth in its market size. The company’s shares have, therefore, started trading at increasingly higher multiples in recent years. The valuation multiples are also backed by fundamentals such as increasing population, rising per capita consumption, and increasing disposable income in the country. Therefore this category gets 5 starts in Dabur fundamental analysis.

9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ★)

The leverage ratio has come down over the years and the Interest burden ratio has been stable over the years. The asset turnover has seen a slight decline and the operating margin has improved in recent years. Overall the company has seen a decline in Return on Equity due to a reduction in leverage and not profitability. Therefore this category gets 5 starts in Dabur fundamental analysis.

10. Future Prospects (★ ★ ★ ★ ☆)

Some insights for the coming years from the analysis, management discussions, and con calls are as follows.

The company will suffer from revenue loss in double digits due to the factory shutdowns, production loss, and disrupted supply chains because of the Covid-19 outbreak. The situation, however, is only temporary and any significant growth since the 2019 base year will only be witnessed after FY 2021.

There has been a sharp slowdown in India’s oral care industry since the last year. Dabur, however, has gained a 0.3% market share in FY 2020 with 8.5% sales growth. Down-trading is expected in the oral care category in the coming years. (Down-trading is defined as reducing the number of features (and their associated benefits) or the quality of a product to suit the selling price demanded by its customers)

Rural sales for Dabur grew 4% ahead of urban in the 3rd Quarter of FY 2020. This was due to the increased village reach and direct distribution. Overall domestic sales growth was 5% YoY with 5.6% volume growth for the company.

Apis India, which is a leading producer and exporter of honey is looking forward to expanding its business and compete with Dabur. Apis already does the bottling for big brands including Dabur and Patanjali as well as for the international chains such as Walmart and Metro Cash & Carry. Dabur Honey enjoys a market share of about 60% but this can lead to a reduction in market share for Dabur honey in the future.

Overall the company has solid fundamentals along with large scale, solid branding, and wide distribution. The product portfolio and business model are also well-diversified which will help Dabur to sail through these uncertain times. However, the company is facing increased competition in certain key segments which can slow down its upcoming growth. Therefore this category gets 4 starts in Dabur fundamental analysis.

The overall rating is arrived at by taking the average of the above 10 category ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.

Overall Fundamental Rating: DABUR SHARES (4.6/5)