Dabur: Riding on the Ayurveda Wave

Dabur India is set to continue growing with the growth of the Ayurveda Industry. A market leader in the Ayurveda space, the company looks like a compelling buy with its diversified portfolio, and growth plans. Dabur has grown its market share and volumes amid tough market environment, and high competition. The focus on bolstering its innovation pipeline, especially in natural segment, and premiumising the same is helping the company gain share in the increasing pie of naturals and ayurveda, and also aiding margin improvement.

I recommend buying Dabur on dips and holding it for a very long period of time and letting the money grow.

That is, until Patanjali goes Public (jk)

Note: There are no immediate catalysts, so if you’re the one to check the stock price every day, you might want to pass on this one.

Price target over a two-year time horizon:

Target: 395

Upside: 32%

Best Case Scenario: 460 (53% upside)

Worst Case Scenario: 334  (11.3% upside)

Company Overview:                                                                 

Dabur India Limited is a fast moving consumer goods (FMCG) company. Dabur has two divisions in India: Consumer care division and Foods division. Consumer care division offers a wide range of products in hair care, oral care, health supplements, digestives and candies, baby and skin care products based on ayurveda, over-the-counter (OTC) products, Asavs, and branded ethical and classic products. The Foods division produces fruit juices, cooking pastes, sauces, and items for institutional food purchases.

International Presence:  The Company sells its products in domestic as well as international markets. Currently Domestic markets form 68% of revenue and international constitute the other 32%.

The company has acquired two international companies in the past, Hobi  (Turkey) and Namaste (USA) to increase its international presence. Over the years, it has expanded its reach internationally, growing business organically as well as inorganically.

There is still a lot of opportunity in the international space with the increasing awareness about Ayurveda.

Competitive Positioning: It must be noted that Dabur is the largest producer of Ayurveda Products in India.

It currently has significant market share and rank in all product segments.

Source: Investor Presentation

With popular brand names such as Real Fruit Juice (55% market share) and Vatika (17% market share), to name a few, Dabur is a leading brand in all verticals.

FMCG Sector overview:

The current size of the FMCG market is 45 Billion. The FMCG sector has grown at an annual average of about 11 per cent over the last decade.  The overall FMCG market is expected to increase at (CAGR) of 14.7 per cent to touch US$ 110.4 billion by 2020, with the rural FMCG market anticipated to increase at a CAGR of 17.7 per cent to reach US$ 100 billion by 2025. Growth drivers in the sector are rising disposable income, increasing penetration and consumption and evolving consumer lifestyle. According to Neilson, Dabur, Marico and Baba Ramdev's Patanjali Ayurved are driving the growth in the FMCG space.

                                          Source: IBEF

Since Foods and hair care are leading segments for Dabur as well, growth in the FMCG sector, will have a major impact on top line.

Ayurveda Industry Overview:

The Indian Ayurveda market is currently INR 25,000 cr.

At a global level, Ayurveda products are in great demand. The World Health Organization has projected that the market will reach $5 trillion by the year 2050.  Presently, the total turnover is around $62 billion; with India and China being the major players.

In India, the Ayurveda industry is comprised of organized and unorganized sectors that function to cater to the needs and demands of the populace. The organized sector is controlled by major players like Dabur, Zandu, Himalaya, Vicco Laboratories, where they play a vital role in promoting Ayurveda both in the domestic and the international markets.  The unorganized sector is run by small Vaidya (Ayurveda experts) families or micro units, who have traditionally been in this field.

The government of India has been taking adequate steps to promote the industry. The government set up the Ayush (Ayurveda, Yoga, Unani, Siddha and Homeopath) Ministry in 2014 to promote the industry.

Dabur is expected to benefit from this market expansion because of its strong product portfolio and a nationwide distribution network.

Investment Trends:

Launch of new products

Dabur has a selective approach towards new launches. Given weak market growth trends, Dabur plans to introduce new products, which have a niche positioning and have a higher probability of consumer acceptance. Some of the recent launches include Real VOLO (aerated fruit beverage), Real Mausambi variant and Honey fruit spreads. These product launches strengthen Dabur’s presence in the FMCG market and because these products are premium, they compete well with MNC players.

Dabur is incubating 200 products, some of which are planned for launch over the counter.

Move towards Ayurveda

Currently, Dabur derives ~60% of it’s revenue from Ayurveda products. Dabur has set itself a target of generating 75 per cent of its revenue in India from products based on Ayurveda by 2020. The move follows the surging popularity of Ayurveda and herbal products in the country and increasing competition from rival brands like Patanjali.

The company plans to increase sourcing medicinal herbs, expand capacity, develop formulations and renew brand promotion to make this possible.

The majority of Dabur’s forthcoming launches, including its baby care portfolio, will be based on Ayurveda. After launching Dabur Baby last year, the company is planning to launch soap, shampoo, body talc and oil. Ayurveda-based baby care would help Dabur differentiate itself from market leader Johnson & Johnson and challengers like Hindustan Unilever.

Expansion plans

Dabur plans to double its herb cultivation as it plans to launch newer ayurvedic products amid growing demand and increasing competition from Pantanjali.

Dabur is setting up its biggest greenfield plant in Tezpur in Assam to manufacture two-thirds of the company’s products.  The company is investing Rs 250 crore in the plant, which should be operational by next March. This plant will cater to markets in the northeast, east and north.

The company will then have 3,800 acres of medicinal herb farms by, its fastest expansion so far. At present, it has nearly 2,000 acres under cultivation.

"We are preparing ourself for the next cusp of high demand as our volume growth is still high, partly due to promotions," said Sunil Duggal, CEO at Dabur.

Apart from herb cultivation, Dabur is planning to invest another INR 250 crore in other projects.

Around 100 crore will be invested in building a factory in Uttaranchal. Another 100 crore will be incurred in expanding the company’s international business.

Dabur is also finishing up the expansion operations that it undertook in Patnagar, Uttarakhand. The plan will become operational by January 2017 and is expected to make Dabur self-sufficient in India for supply of juices. Earlier, 60 per cent of juices sold by the company were sourced from its plant in Nepal, where political unrest led to a Rs 100 crore dip in sales in September-December 2015.

These expansion plans will allow the company become self sufficient, and remain competitive. Over the next few years, it drive the top line.

Demand from rural markets

Dabur is set to benefit from recovery in rural growth, which contributes ~45% to total sales, helped by rural-centric initiatives announced in Budget 2016 and likely good monsoons (forecasts indicate good monsoon in FY17).

The company has undertaken initiatives to increase distribution in these areas. Project Double was an initiative rolled out by Dabur in FY13 to expand direct coverage in rural markets

Direct Village coverage has increased from 14000 villages in FY11 to 44,000 villages in FY15. Earlier, this programme was through outsourcing, which will now be done in-house, which will likely increase its efficiency.

The company has also hired a new sales force of 1,000 personnel, which will bolster distribution.

Ban on fixed dose combination drugs

Dabur’s Honitus is positioned for growth as an alternative to other cough syrup, many of which have been banned by the government, as part of its clampdown on fixed-dose combination drugs.

Dabur, could cash in by pushing their products into the vacuum created in the market by the ban.

                                           Source: Economic Times

Development of E-Commerce Platform

Dabur is planning to start an online platform where it will sell products of other companies, along with its own. The platform is likely to go live next year. The fast-moving consumer goods (FMCG) major would sell ayuveda-based health care products, along with providing information on ailments and therapy.

FMCG is expected to follow ticketing, electronics, and fashion categories in e-commerce.  A recent study by CII and Boston Consulting Group (BCG) states that by 2020, more that 150 million consumers in India would be digitally influenced. Various studies have predicted the Indian e-commerce market to touch a size of $100 billion by 2020 from around $13 billion at present.

Currently, ecommerce accounts for just two percent of the retail sector. But, it is estimated that it will grow to almost 11 percent by 2019.

Dabur, with its online platform would be poised to take advantage of this opportunity.

The company, which has ventured into online cosmetics and beauty products through NewU, run by its wholly owned arm H&B Stores, is also working on another platform DaburUveda.com to enhance its presence in the e-commerce space.

"We do see that e-commerce is going to expand in a very big way. Thanks to technical development and increased mobile phone penetration, the e-commerce opportunity is going to be very very big. We feel that it is going to expand further in the middle and long term scenario”, said Dabur India CEO, Lalit Malik.

The company already has a well-developed platform: https://www.liveveda.com

Growth in Oral care and Healthcare segments

Dabur's Red toothpaste has muscled its way into the top three toothpastes' charts in the country, riding the herbal Ayurveda wave.

                                          Source: Economic Times

In the most recent quarter, Oral Care performed well with 11.6% growth, led by double-digit growth in the Toothpaste portfolio where Red Toothpaste and Meswak continued the strong momentum driven by consumer advocacy and focused marketing activities. The company’s  market share in Toothpaste category reported increase of 200 basis points over same quarter last year. With the current pace of promotional activities, it could be number one within the next few years.

Since oral care forms 16% of FMCG spending, and Dabur derives 15% of its revenue from the oral care segment, continuation of this trend could lead to significant top line growth.

Financial Performance

Dabur’s financial performance has been steadily increasing over the past couple of years.

The company has exhibited solid sales and EPS growth over the past 5 years. Sales have grown at a CAGR of 13% and EPS has grown at a CAGR of 18%.

Current Scenario and Q1 performance

Q1FY17, revenue growth was tepid, 1.1% YoY, due to demand slowdown, amongst other industry headwinds. EBITDA and PAT growth was 8.7% and 11.8% YoY, respectivelyHigher promotions helped volume growth of 4.1% YoY (base of 8.1% YoY), but impacted by PAN card requirement (wholesalers de-stocked in Uttar Pradesh and Madhya Pradesh). Gross margin expansion of 103bps YoY was ploughed back to consumer promotions, while EBITDA margin jump of 126bps was helped by 159bps YoY dip in Ad spends. According to recent conference call, Dabur expects to benefit from renewed focus on herbal and likely rural recovery (45% of revenue) on strong monsoon and rural stimulus. Regulatory challenges related to PAN card declaration (in effect since June’16) affected the wholesale channel adversely in the key North and West markets. Management expects the impact to fade in coming months, though.

Valuation:

Dabur is currently trading at a lower multiple compared to it’s peers in FMCG.

Based on a forward multiple of 40x and an estimated FY18 EPS of 9.8, the price target for Dabur is 395.

Risks:

Key downside risks include: 1) further deceleration in volume growth due to moderation in rural growth (~45% of domestic revenues), 2) increased competition in personal care categories such as skin care, oral care and hair care and/or increased competition in Ayurvedic/herbal space from likes of Patanjali (Honey, Chyawanprash, Toothpastes and Hair Oils are some of the overlapping categories), and 3) any earnings-dilutive acquisitions.

Why wouldn’t you buy Greenply?

Summary

·      Company expected to benefit from tailwinds in the economy such as increasing disposable income, rapid urbanization, seventh pay commission etc.

·      Implementation of the GST should lead to increased market share.

·      Growth in the housing/ real estate sector due to “housing for all” by 2020 scheme and development of smart cities.

·      Company setting up a new MDF plant in Andhra Pradesh to increase geographical reach, substitute imports and boost margins.

·      Company undervalued. Target of 302-339 over the next few quarters.

Company Overview:

Greenply Industries Limited is India's largest interior infrastructure company with a turnover of Rs. 1655 crore. The company is a market leader in the production and distribution of plywood and MDF boards accounting 26% of the organized plywood market in India and 30% market share in domestic MDF market.

Plywood & Allied Products account for 71% of the total revenues (in 1QFY17), while MDF accounts for the balance 29%.

The company has a comprehensive portfolio of residential and commercial flooring products: plywood & block boards, MDF and Wood floors under the reputed brand names of Greenply Plywood, Green Club Ply, Ecotec, Green Panelmax, and Green Floormax, to name a few.

Currently GIL has five state of the art manufacturing facilities, across the country, manufacturing products of global standards; 4 state of art manufacturing facilities for Plywood at Tizit (Nagaland), Kriparampur (West Bengal), Pantnagar (Uttarakhand) & Bamanbore (Gujarat) and one for Medium Density Fibreboards (MDF) at Pantnagar (Uttarakhand). GIL’s MDF facility is the largest in country.

Industry Overview:

The Indian wood panel market 
is valued at Rs. 285 billion. The market has been growing at 10- 12% CAGR over the last few years.

Plywood industry size–Rs.180billion

MDF industry size – Rs.16 billion

The plywood industry is one of India’s oldest industries. The industry has been growing at 6-8% CAGR in terms of volume over the last decade.  Unorganized players, located in clusters across the country, primarily dominate the industry. It constitutes over 75% of the industry size (`140 billion), with the balance being accounted for by organized players. The organized industry has been growing at 15-20% CAGR over the last decade owing to the consistent shift happening from unbranded to branded plywood.

The 16 billion MDF market has been growing at a CAGR of 15-20% over the last 5 years. With increasing urbanization, there is a rising demand for readymade furniture, manufactured with engineered panels like MDF.

Tailwinds in the industry include higher disposable income, rising urbanization, real estate sector’s growth in tier II and tier III cities, fast-growing replacement market and a reduced home renovation cycle from 15 years a decade ago to five years. FDI in the Indian real estate sector and the government’s Housing-for-All by 2022 initiative and development of 100 Smart Cities are some growth drivers for the revival of the real estate and construction sectors.

Investment Trends:

1.    GST Implementation to Result in Higher Market Share

GST is expected to be favorable for the branded Plywood manufacturers primarily because of change in the taxation structure.

At present, on purchases of Plywood from GIL, the dealer pays Central Excise Duty and a Value Added Tax. The Excise Duty is a cost for the dealer as he does not get an input credit for that but gets an input credit for the VAT paid. Now when GST is implemented both the Central GST, which will replace Excise Duty as well as the State GST, which will replace Value Added Tax will be cenvatable for the dealers. As a result dealers cost of purchasing from organized branded players will come down by about 10%.

Furthermore, currently unorganized players do not pay Excise Duty by maintaining their annual turnover below Rs. 1.5 crore which is exemption sealing for payment of Excise Duty. When GST is implemented this exemption limit will be 10 lakh per annum, so it will be very difficult for a manufacturer to maintain its annual turnover below that. Consequently, most of them would fall into the tax net although they might still not be paying probably more than 25-30% of their actual taxation, but nonetheless their cost will increase. This will help reduce the price gap between branded and unbranded. The company estimates price gap to come down to somewhere between 6-8%, which is 15-20% at the moment, once GST is implemented. 

Therefore, the rollout of GST is expected to facilitate a faster shift from unorganized to branded products in the plywood space.

2.    Tailwinds in the Macro Economy

Urbanization: Over the last decade, India’s urban population has grown by 2.47% annually, making it the fastest urbanizing country. This trend is consistently strengthening the prospects of India’s plywood industry.  The rural segment also contributes to 8-10% of the country’s plywood demand; and thus, there exists a latent opportunity from rural India.

Disposable Income: The average age of the Indian population is a mere 24 years. Add to this the fact that these individuals are armed with progressively larger wallets (from H80,388 in FY14 to H88,533 in FY15) means that disposable incomes are on the rise. Disposable income is expected to keep increasing. Furthermore, nuclear families are the new normal in India, further catalyzing the need for quality housing and interiors.

Seventh Pay commission: Currently, the Seventh Pay Commission has recommended an overall hike of 23.6%. This would benefit ~1.4 crore government employees, subsequently leading to higher disposable income. This could spurt building material segment’s demand, including plywood

Rising per capital income: The middle-class segment is expected to grow to 110 million by 2020 from 58 million households in 2010. With the increase in per capita income, it is likely that people will have more money and subsequently the spending on home decoration front will also rise, leading to a huge possibility for the plywood industry.

3.    Tailwinds in Housing and Real Estate

India’s real estate market is expected to grow at 30% over the next decade. This will be driven by the government’s increased focus on affordable housing and easy financing.

Housing for all: Indian investment is being driven into housing sector after the Government of India announced the ‘housing for all’ initiative. Under the initiative, India is expected to develop about 11 crore housing unit  s and imvestments of more
than USD 2 trillion are expected until 2022. 

Smart Cities: The Indian government has targeted the creation of 100 smart cities by 2017, allocating B70 bn in the 2016 Budget. This represents one of the most exciting drivers of real estate development and related offtake of interior infrastructure products.

Commercial Property Growth: Absorption of commercial office space in India is expected to grow at 10%. Increasing demand for office space will drive the demand for the interior infrastructure industry

4.    Implementation of Anti-Dumping Duty to Increase Realizations

Till now Anti-Dumping Duty did not have any significant impact on MDF’s volumes since Indonesia and Vietnam were not covered. Therefore, imports basically changed from China, Malaysia, Thailand and Sri Lanka to Indonesia and Vietnam. So there was shifting of imports from countries, which were impacted by the Anti- Dumping Duty to countries, which the Anti-Dumping Duty did not cove, and there was no real impact on sales of domestic manufacturers. Recently, the government included all six countries, which will boost volumes in the MDF segment since imports will be substituted with domestic products.

These trends favorably impact all the companies in the industry. However, Greenply is a better pick due to its new expansion plans, solid track record, strategic approach and strong brand name.

1. New facility in Andra Pradesh

The company is planning to open a new Greenfield MDF plant at Chittoor, Andhra Pradesh, with an installed capacity to produce 1,200 cubic meters
of MDF per day. This project’s expected capital outlay is around Rs. 700 crore.

With the new MDF plant, the company would be able to cater to domestic demand since the company expects the MDF market to grow at 10-15% over the next 3-4 years. The company will also be able to compete in the southern market, which is currently catered to mainly by Rushil Décor apart from imported MDF. Currently, GIL caters to southern India from its Jharkhand plant which leads to a compromise on the margins as freight cost is significant. With the new plant, Freight cost will come down from about 12-13% to about 4-5%, which will enable the company to compete effectively with imports. The possibility of exports would also increase substantially due
 to proximity to port (within
100 kms), enabling savings
of inland freight cost. The company will also have an advantage in exports because of the product quality. Major markets for exports would likely be the Middle East, Pakistan, Iran, Sri Lanka, Nepal and Bangladesh

As of today land development work has been commenced and management anticipates it to complete by H1FY19. The project will boost topline and bottom line in medium term, as MDF is a higher margin business (in Q1FY17, EBITDA margin for MDF was 30.2% and for plywood it was 9.8%).

 2. Solid Track Record

The company has consistently been growing. This quarter, due to a slowdown in demand, Q-O-Q revenue has declined. However, on a YOY basis, Net sales are up 9.3% (of which plywood revenues are up 7.7% and MDF revenues are up 11.4%). PAT has also grown by 26.4% on a YOY basis.

Looking at a longer horizon, from FY12-16, net Sales, EBIDTA and PBT have increased at a CAGR of 11.6%, 20.8% and 42.3% respectively.

This growth momentum is expected to continue.

3. Moving Towards an Asset Light Model - Future Growth Through the Outsourcing Route

Currently, capacity utilization for plywood is 111% and for MDF is 106%. So there is only 5%-10% upside remaining to reach its peak utilization. GIL has therefore cautiously taken the decision to increase its outsourcing for plywood from currently 22% (value terms) to the 30% in next 2-3 years. As the plywood industry is only growing at 6-8% CAGR in last decade, greenfield or brownfield expansion doesn’t make sense for smaller incremental volumes which will take substantial time to reach breakeven. Introduction of GST to reduce the benefit enjoyed by unorganized players, and GIL can therefore, tie up with them in future to outsource some part of their sales. This focus on asset light model will help GIL to improve return ratios going forward. Furthermore, mid-segment variants to be outsourced will free existing 
capacities for premium variants. However, outsourcing could lead to quality deterioration. To keep that in check the company has set up a team on the vendor’s site to monitor quality of inputs and ensure consistent quality of finished product.

4. Strong brand Name

Greenply has emerged as India’s largest interior infrastructure company. The company has a strong brand name in the country and has been spending a decent amount on advertising and marketing. Ad expenditure to sales was at 3.3% in Q1FY17 compared to 2.7% last year. The company expects to continue spending ~3% of revenue on advertising.

The current trend of consumers shifting from unorganized players to branded names should favorable impact Greenply.

Peer Analysis:

Greenply faces high competition from Centuryply. However, Greenply is a better stock pick because of its consistently increasing EPS and profitability margins.

In the most recent quarter Centuryply’s Plywood margins declined 210 bps YoY, which dragged the overall company’s operating margins lower by 140bps to 16.8%. However, Greenply’s plywood margins have been up 140bps, lifting the overall margins by 80bps to 15.5%. PAT growth is also stronger for Greenply at 26.4% YOY compared to 7% YOY growth for centuryply.

With regard to expansion plans, Centuryply is also in the process of expansion and is putting up an MDF plant in Punjab. However, this isn’t a very strategic move since the new plant is in the north and if the company wants to sell its products in the south, it will have to incur higher freight costs.

Now one might wonder if all these expansion plans could lead to an oversupply of MDF and drive down the price and realizations. Greenply has answered this concern in the earnings call by mentioning that they would be exporting 30-40% of the production from the new facility. The company has already started exporting nearly 12-15% of total production from Uttarakhand at lower realization just to create a market for its upcoming Chittoor plant.

Furthermore, Greenply is a better pick because it is currently trading at a discount to its peers and has a higher ROCE.

Risks:

1. Greenply has a JV with a company in Myanmar, from which it procures raw materials. There have been reports that Myanmar might either reduce felling of timber or may impose a ban on felling on timber. This could prove to be a tailwind for the company. The company is reacting to this by setting up a face veneer unit in Gabon, West Africa.

2. Emergence of substitutes and changing consumer preference: Currently, in the furniture industry, wood-based products like plywood, MDF, particle board, blockboard etc. are being widely used. However, going ahead, with a change in consumer preference, substitutes like cement, plastic or steel could pose a challenge to the wooden industry.