MOSL: DABUR (Upgrade to Buy)-Rural momentum building up remarkably-market share issues getting addressed

​Dabur: Rural momentum building up remarkably; market share issues getting addressed

(DABUR IN, Mkt Cap USD8.7b, CMP INR333, TP INR395, 19% Upside, Upgrade to Buy)

• Dabur's 2QFY18 consolidated sales declined 1.1% YoY to INR19.6b (est. of +2.5%). EBITDA grew 2.7% YoY to INR 4.2b (est. of +5.5%). Adj. PAT increased 1.3% YoY to INR3.6b (est. of +6.7%).
• Domestic FMCG business sales grew 10.7% YoY, led by volume growth of 7.2% (est. of +10%). Oral care, foods, hair oil and health supplements reported GST-adjusted growth of 22.8%, 11.7%, 2.3% and 3%, respectively. International sales grew 3.9% in constant currency (CC) terms.
• Consol. EBITDA margin expanded 80bp YoY to 21.4% (est. of 21.0%). Gross margin contraction of 110bp YoY to 50.1% was offset by lower other expenses (-110bp YoY), staff costs (-50bp YoY) and ad spends (-10bp YoY).
• 1HFY18 performance: Net sales for 1HFY18 were down 4.7% YoY to INR37.5b. EBITDA margins expanded 20bp YoY to 19.4%. Absolute EBITDA declined 3.8% YoY to INR7.3b, while adj. PAT declined 1.5% YoY to INR6.4b.
• Valuation view: Rural outlook appears buoyant, with companies like HUL, Marico and now Dabur reporting either similar or faster growth in rural sales compared to urban sales after a long time. Worries on both the wholesale channel and rural sales (in both of which Dabur has disproportionately high exposure compared to peers) are actually receding faster than expected. Importantly, rural sales have started gaining momentum even before the benefits of good monsoon and government initiatives like DBT, MSP increases and farm loan waivers have started to come in. The much-vaunted earnings revival in the sector appears poised to come through, and rural dependent plays are likely to be at the vanguard. Dabur has also addressed the issues of market share losses in its two key categories of juices and honey, while oral care continues to do very well. With expected EPS CAGR of ~18% v/s less than 12% over FY14-17, our earlier target multiple discount of 10% to three-year average no longer applies. Valuing the stock at 39x Sep-19E (5% premium to three-year average), we get a target price of INR395. Upgrade to Buy.