5 Reasons Why You Should Buy Dabur
Find out why Dabur is a strong investment for your portfolio
Often when growth outlook tapers or inflation becomes a big concern, investors turn to FMCG stocks. As a matter of fact, even when the market is witnessing a bull run FMCG stocks are a key aspect of an investor’s portfolio. That’s why it can be said that FMCG stocks are “evergreen stocks”.
The Indian stock market is home to some excellent FMCG companies that have seldom disappointed investors. One FMCG stock that stands out for us is Dabur. Dabur is one of India’s largest FMCG companies with products ranging from over-the-counter medicines to personal care. In this update, we will highlight 5 reasons why Dabur is a sound investment proposition -
Covid Resilient
Inflation Proof
Growing Business Categories
Strong Rural Presence
Excellent Financials
Covid Resilient - The beginning of 2020 saw an unprecedented crackdown of the markets. The Nifty had cracked by as much as 33% and the Sensex was down to 2016 levels. While people panicked and markets were extremely volatile to say the least, Dabur was relatively calmer. The stock fell by only 16%. While this number seems high, in the context of the weakness in the broader markets Dabur held its ground tight.
Inflation Proof - For a couple of months, the CPI was over RBI’s comfort zone of 2-6% and the markets were fearful of rising inflation. While most consider inflation to be a transitory issue, it is important that a company can navigate its way through choppy waters. Despite a steep increase in commodity prices, Dabur’s gross margins only contracted by slightly more than one percent. However, with reductions in employee and marketing expenses, the company was able to protect the operating margins at 21.1%. With the company expecting prices to stabilize in the coming months, and a healthy operating margin, Dabur seems to be in a good position to ride out this period of high inflation.
Growing Business Categories - Dabur has a wide domestic and international reach. The company has a total distribution reach of 6.9 million retail outlets with a direct reach of 1.3 million outlets. It is expected to increase direct distribution to 1.5 million outlets in the next two years. On a y-o-y basis, in Q1FY22 domestic sales grew at 33% while international business witnessed a growth of 28.5%. Dabur has about 9 business categories and all have recorded strong growth. The ayurveda and herbal products have strong tailwinds given people have focused their consumption on healthy immunity boosting products. Dabur is one of the biggest players in the Honey and Chyawanprash categories. These products are underpenetrated and have shown solid growth with a 24.5% uptick in sales on a yearly basis. Other sectors that recorded strong yearly growth were food (52%), OTC medicines (52%) and ethical products (51%). Honey and chyawanprash will be big drivers of future growth among other sectoral tailwinds.
Strong Rural Presence - Given India’s large rural economy, rural consumption is a vital component of any FMCG company’s top line. Dabur has a very strong rural network. The company derives about 50% of their sales through rural regions with a presence in 60,000 villages. The number of villages they reach is expected to increase to 80,000 over the next two years. Given high levels of agriculture, consumption in rural India is highly dependent on the monsoon activity. With a good monsoon expected this fiscal, rural consumption should be healthy.
Excellent Financials - Dabur is one the rare companies for whom the 2020 revenue did not dip below 2019 levels. This goes to show the strength of the management and how well positioned a company Dabur is. For Q1FY22, the company reported a strong set of numbers with revenue growth at 31.9%. The two years sales CAGR stands at 7.2% helped by growing domestic and international sales and expansion into new categories like edible oils, spreads and carbonated drinks.
An interesting development to note in the industry will be Baba Ramdev backed Patanjali’s IPO. Dabur has been able to grow both the volume and sales of its herbal products despite having strong competition. We are extremely confident in Dabur’s management and the quality of their products. The coming quarters will be interesting as Dabur might potentially compete with the listed Patanjali. The market is big enough to house two strong players, but we believe Dabur will retain its growth momentum going forward.
Just like any other stock, Dabur has its own risks. The failure of its new initiatives or a third Covid wave which could jolt both rural and urban consumption can be detrimental for the stock. But such risks come with investing in any stock and are a part of the game. Dabur seems to have fair valuations and the management is focusing on growth. With a growing presence in the markets and addition of potentially high yielding categories, Dabur has the potential to deliver strong returns to its shareholders. This value proposition is further amplified by a shift in consumption towards healthier, natural & ayurveda based products. Depending on your approach to investing, Dabur can constitute anywhere from between 5-15% of your portfolio.
Excellent analysis