25 OCT 2017 Company Update DABUR INDIA HOLD FMCG Target Price: Rs 325 Going aggressive in hair oils Dabur India has stepped up its aggression in the Indian hair oils CMP : Rs 318 Potential Upside : 2% segment. Recent advertisements show Dabur offering its coconut light hair oil at ~35% discount to similar offering by category leader Marico. Its coconut hair oil is also at 20% discount to Marico’s offering. MARKET DATA As hair oil is in a structural slowdown, Dabur seeks to draw consumers No. of Shares : 1,762 mn Free Float : 32% in this high-loyalty category by disruptive pricing. While its bid to eat Market Cap : Rs 560 bn market share in the coconut oil category from Marico has met with 52-week High / Low : Rs 324 / Rs 259 limited success in the past, this time pricing discount is too steep and Avg. Daily vol. (6mth) : 1.6 mn shares hence would be interesting to see consumer and Marico’s reaction. Bloomberg Code : DABUR IB Equity Promoters Holding : 68% Maintain HOLD with TP of Rs 325 on 35x forward P/E. We estimate FII / DII : 18% / 8% consolidated sales and EPS CAGR of 8% and 9% over FY17-19E with OPM stable at 19.8%. Valuation at 36x FY19 P/E looks fair. Fight for market share: Marico ate into share of Dabur’s forte, Amla hair oil, by offering its product at a discount. Marico’s Nihar Shanti Amla hair oil (Amla hair oil offering) increased its value market share from 9% to 37% over FY10 to now at the cost of Dabur’s Amla oil whose share eroded from ~80% to ~55% over this period. In volume terms, Marico (at ~40%) has overtaken Dabur. In May 2016, Dabur tried to cut into Marico’s forte, coconut hair oil, by offering Dabur Anmol Gold at ~7-10% discount to Marico’s Parachute. However, Dabur was not much successful. This time around, Dabur has priced its coconut light hair oil at 35% discount to Marico’s Parachute Coconut Hair Oil Jasmine. Our view: Hair oil category is in a structural slowdown. As per Nielsen, hair oil category volume has grown at sluggish 2.8% CAGR over FY10-16 with no volume growth over FY12-16. To drive growth, companies have not only stepped up new product launches in existing categories but have also entered into new categories. Price disruption is a key tool to switch consumers in this high-loyalty category. Around 20% discount in coconut oil and ~35% discount in coconut light hair oil by Dabur is quite aggressive. Financial summary (Consolidated) Key drivers Y/E March FY16 FY17 FY18E FY19E (%) FY17 FY18E FY19E Sales (Rs mn) 84,028 75,922 79,108 88,692 Dom sales growth (1.0) 7.2 11.0 Adj PAT (Rs mn) 12,500 12,768 13,642 15,329 Intl sales growth (4.9) (3.0) 15.0 Con. EPS* (Rs) - - 7.9 9.1 Gross margin (consol) 50.8 50.8 50.9 EPS (Rs) 7.1 7.2 7.7 8.7 EBITDA margin (consol) 19.9 19.6 19.8 Change YOY (%) 16.7 2.0 6.8 12.4 P/E (x) 44.7 43.8 41.0 36.5 Price performance RoE (%) 33.2 28.3 26.0 25.1 120 Sensex Dabur India RoCE (%) 33.9 30.4 29.3 29.9 110 EV/E (x) 35.4 35.4 34.0 29.6 100 DPS (Rs) 2.2 2.2 2.6 3.0 90 Source: *Consensus broker estimates, Company, Axis Capital 80 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 25 OCT 2017 Company Update DABUR INDIA FMCG Disruptive pricing to gain share in light hair oil To gain share in light hair oil segment, Dabur India is looking to drive its Dabur Anmol Coconut Oil Jasmine through disruptive pricing – at 35% discount to the competition. The product launched in January 2017 is currently targeting states in western India like Maharashtra, Gujarat and parts of Madhya Pradesh. The product will be taken to northern India in the next phase and, then across India. As the segment is less commoditized, Dabur will be maintaining disruptive product pricing. Last year, when it launched price war in coconut oil through Dabur Anmol, it gained 100-150 bps market share in the category (current share ~5% with Vatika and Anmol brands). Dabur’s aggressive price cuts in light hair oil (Oct-17) Dabur highlighting its product is available at a discount of 35% to product offering from category leader Marico Keep a note of product formulation: Product formulation for Parachute Advanced Jasmine comprises of ~80% LLP and 20% coconut oil, while that for Dabur Anmol Coconut Oil Jasmine has 86% LLP and 10% coconut oil Source: Media, Axis Capital 02 25 OCT 2017 Company Update DABUR INDIA FMCG Dabur cuts coconut oil price In May 2016, Dabur offered Dabur Anmol Coconut oil at 7-10% discount to Marico’s Parachute (the discounting has widened to ~20% since). Dabur attacked Marico with price cuts in coconut hair oil (May-16) Dabur highlights its product is available at 7-10% discount to product from category leader Marico Source: Media, Axis Capital 03 25 OCT 2017 Company Update DABUR INDIA FMCG Marico goes aggressive in Amla hair oil category Marico cuts Amla hair oil price (Sep-14) English translation of the ad: “ Nihar Shanti Amla is better than Dabur Amla. It also makes your hair beautiful. Nihar Shanti Amla has 500% higher Vitamin E than Dabur Amla and costs 30% lower. So when do you plan to change your oil? “ Pricing of key Amla oil brands of 200ml pack: Dabur Amla – Rs 84 Bajaj Brahmi Amla – Rs 84 Shanti Amla − Rs 56 ^ ^ (Standardized for 200ml based on pricing of 175ml pack) Source: Media, Axis Capital Amla based hair oil pricing (Sep-17) Offering Company Weight Price (Rs) Formulation Dabur Amla Hair Oil Dabur 180 ml 84 Amla 58% LLP 40% Dabur Amla Sarso Hair Oil Dabur 175 ml 47 Mustard and Amla extract 40%, LLP 58% Nihar Shanti Amla Marico 175 ml 47 Amla Seed Oil 35% LLP 64% Patanjali Kesh kanti Amla Hair Oil Patanjali 100 ml 40 NA Bajaj Brahmi Amla Hair Oil Bajaj Corp 200 ml 84 LLP with Brahmi and Amla 61.5%, Vegetable oil 37.15% Source: Company, Axis Capital 04 25 OCT 2017 Company Update DABUR INDIA FMCG Hair oil category Hair oil category size (Rs mn) Hair Care Rs 196 bn Coconut Oil Hair Oil Rs 32.8 bn Rs 66.5 bn Amla Based Oils Light Hair Oils VACNO Ayurvedic/ Herbal Cooling Hair Oils 45,065 Tn 33,989 Tn 29,292 Tn 7,730 Tn 19,013 Tn (1%) Rs 15.7 bn Rs 16.9 bn Rs 11.2 bn Rs 7.4 bn Rs 9.6 bn Source: Bloomberg, Axis Capital Valuations 1-year fwd. PE on consensus EPS PE (x) 10 yr median 40 35 30 25 20 15 10 Oct-06 Oct-07 Oct-08 Oct-11 Oct-12 Oct-15 Oct-16 Oct-17 Oct-09 Oct-10 Oct-13 Oct-14 Source: Bloomberg, Axis Capital 05 25 OCT 2017 Company Update DABUR INDIA FMCG Financial summary (Consolidated) Profit & loss (Rs mn) Cash flow (Rs mn) Y/E March FY16 FY17 FY18E FY19E Y/E March FY16 FY17 FY18E FY19E Net sales 84,028 75,922 79,108 88,692 Profit before tax 15,546 16,103 17,149 19,345 Other operating income 181 214 134 149 Depreciation & Amortisation 1,338 1,429 1,620 1,709 Total operating income 84,209 76,136 79,242 88,840 Chg in working capital 1,078 156 (1,072) (551) Cost of goods sold (37,976) (37,554) (39,049) (43,676) Cash flow from operations 13,134 10,513 10,631 12,935 Gross profit 46,233 38,582 40,193 45,164 Capital expenditure (2,338) (598) (3,079) (2,000) Gross margin (%) 55.0 50.8 50.8 50.9 Cash flow from investing (7,869) (5,161) 3,330 41 Total operating expenses (31,008) (23,493) (24,663) (27,561) Equity raised/ (repaid) 3 2 - - EBITDA 15,225 15,090 15,529 17,603 Debt raised/ (repaid) (1,566) 1,073 (6,465) - EBITDA margin (%) 18.1 19.9 19.6 19.8 Dividend paid (4,764) (4,770) (5,516) (6,364) Depreciation (1,338) (1,429) (1,620) (1,709) Cash flow from financing (5,821) (4,507) (12,018) (6,358) EBIT 13,888 13,661 13,910 15,894 Net chg in cash (556) 844 1,943 6,619 Net interest (480) (540) (354) (139) Other income 2,138 2,982 3,594 3,589 Key ratios Profit before tax 15,546 16,103 17,149 19,345 Y/E March FY16 FY17 FY18E FY19E Total taxation (3,018) (3,303) (3,473) (3,979) OPERATIONAL Tax rate (%) 19.4 20.5 20.2 20.6 FDEPS (Rs) 7.1 7.2 7.7 8.7 Profit after tax 12,528 12,800 13,677 15,367 CEPS (Rs) 7.9 8.1 8.7 9.7 Minorities (27) (31) (34) (38) DPS (Rs) 2.2 2.2 2.6 3.0 Profit/ Loss associate co(s) - - - - Dividend payout ratio (%) 31.6 31.0 33.6 34.5 Adjusted net profit 12,500 12,768 13,642 15,329 GROWTH Adj. PAT margin (%) 14.9 16.8 17.2 17.3 Net sales (%) 8.1 (9.6) 4.2 12.1 Net non-recurring items 27 1 - - EBITDA (%) 15.3 (0.9) 2.9 13.4 Reported net profit 12,527 12,770 13,642 15,329 Adj net profit (%) 16.9 2.1 6.8 12.4 FDEPS (%) 16.7 2.0 6.8 12.4 Balance sheet (Rs mn) PERFORMANCE Y/E March FY16 FY17 FY18E FY19E RoE (%) 33.2 28.3 26.0 25.1 Paid-up capital 1,759 1,762 1,762 1,762 RoCE (%) 33.9 30.4 29.3 29.9 Reserves & surplus 39,947 46,712 54,882 63,891 EFFICIENCY Net worth 41,706 48,474 56,643 65,652 Asset turnover (x) 3.8 3.5 3.4 3.5 Borrowing 7,922 9,115 2,650 2,650 Sales/ total assets (x) 1.3 1.0 1.0 1.0 Other non-current liabilities 882 1,080 983 983 Working capital/ sales (x) - 0.1 - 0.1 Total liabilities 50,727 58,917 60,576 69,585 Receivable days 35.1 31.3 35.8 37.2 Gross fixed assets 25,538 28,427 31,727 33,727 Inventory days 58.0 66.2 71.9 74.0 Less: Depreciation (8,258) (8,843) (10,463) (12,171) Payable days 70.4 77.9 80.6 82.0 Net fixed assets 17,280 19,584 21,264 21,556 FINANCIAL STABILITY Add: Capital WIP 448 421 200 200 Total debt/ equity (x) 0.2 0.2 0.1 - Total fixed assets 17,728 20,005 21,464 21,756 Net debt/ equity (x) (0.5) (0.6) (0.6) (0.6) Total Investment 26,433 32,525 29,757 30,757 Current ratio (x) 1.4 1.3 1.5 1.8 Inventory 10,965 11,067 12,553 14,441 Interest cover (x) 28.9 25.3 39.3 114.8 Debtors 8,092 6,504 7,755 9,031 VALUATION Cash & bank 2,198 3,048 4,992 11,610 PE (x) 44.7 43.8 41.0 36.5 Loans & advances 3,586 3,820 3,772 4,320 EV/ EBITDA (x) 35.4 35.4 34.0 29.6 Current liabilities 18,596 18,393 20,093 22,744 EV/ Net sales (x) 6.4 7.0 6.7 5.9 Net current assets 6,566 6,387 9,355 17,072 PB (x) 13.4 11.5 9.9 8.5 Other non-current assets - - - - Dividend yield (%) 0.7 0.7 0.8 0.9 Total assets 50,727 58,917 60,576 69,585 Free cash flow yield (%) - - - - Source: Company, Axis Capital Source: Company, Axis Capital 06 25 OCT 2017 Company Update DABUR INDIA FMCG Disclosures: The following Disclosures are being made in compliance with the SEBI Research Analyst Regulations 2014 (herein after referred to as the Regulations).