Dabur must boost its strategic roadmap

Over the medium term, Dabur aspires to clock sales of ₹7,000 crore in its home and personal care (HPC) business, and ₹5,000 crore for its healthcare business. Furthermore, Dabur aims to drive double digit growth in the food and beverages (F&B) business. Its domestic business has three key verticals: HPC, healthcare, and F&B, which reported revenues of ₹3,845 crore, ₹2,581 crore and ₹1,724 crore (excluding contribution from Badshah Masala acquisition), respectively, in FY23. These segments accounted for 47%, 32% and 21% of its domestic revenues, respectively. As such, Dabur’s domestic business accounts for about 75% of its revenues. The rest comes from the international segment. Going ahead, the company plans to grow international operating revenue in double-digits in constant currency terms.

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Overall, a key strategy across segments includes strengthening the core and boosting the addressable market by expanding into new adjacencies through power platforms. In this backdrop, the company has been increasing thrust on transitioning to power platforms from power brands. Dabur’s power platform strategy involves extending its brands into adjacent product lines and expanding the total addressable market of its product portfolio, which, in turn, is expected to give a further boost to its brands. For instance, earlier, Dabur’s ‘Real’ brand was primarily known to be focused on the juices and nectars category. However, it now encompasses a diverse range of products such as fruit drinks, a PET portfolio, aloe vera based drinks, plant-based drinks like soya and almond, aerated fruit beverages, milkshakes, etc.

Besides, it also plans to increase premiumization of its portfolio. Premium products are about 8-9% of its portfolio now.

But not everyone is enthused about this. As analysts from ICICI Securities Ltd said in a report on 18 September: “In our view, its power platform strategy appears to increase business complexity (a key concern for consensus) which Dabur intends to manage through its organizational strengths."

Driving premiumization is unlikely to be an easy journey for Dabur given its middle class and rural India positioning, they said. In the near term, like other FMCG companies, Dabur faces risks of weakness in rural demand. However, considering its relatively high exposure to the market, it is more vulnerable to rural pressure.

In the September quarter so far, July has been a good month while August was bogged down by poor rains and weak demand. September is likely to see a pick up. In Q2, Kotak Institutional Equities expects low single-digit and middle single-digit growth in volumes and value, respectively, in Dabur’s India business. It helps that Dabur expects FY24 to be better than FY23 with the underperformance in rural markets narrowing gradually versus urban. It aims to clock an Ebitda margin of 19.5% in FY24 and for FY25, the target is more than 20%.

Meanwhile, Dabur also highlighted that consolidated revenue in FY19-23 saw 7.8% compound annual growth rate (CAGR) since it set out a new strategy four years ago. This is an improvement from 2.2% CAGR seen in the previous four-year period.

Hereon, investors will be monitoring the progress towards its new targets. For now, shares of Dabur have been a laggard in 2023, underperforming the Nifty FMCG index by a wide margin. Analysts reckon valuations factor concerns as well as near-term positives adequately, one of which is the anticipated gross margin expansion amid easing cost pressures. But then again, higher advertising spends are likely to curtail Ebitda margin expansion.

The stock trades at 44 times estimated earnings for FY25, according to Bloomberg data. But investors should note that while there are no obvious tailwinds, the rural demand recovery has been painfully slow, which may cap large upsides.