Motilal Oswal Says Buy Dabur India Stock with Target Price of ₹700

Motilal Oswal is optimistic about Dabur India and has given it a “Buy” rating with a target price of ₹700 in their report dated October 14, 2024.

Recent Performance Insights

Dabur India faced challenges in its second quarter (2QFY25) due to heavy rains and floods, which affected out-of-home consumption, particularly for beverages. The company also noticed high inventory levels in its General Trade (GT) channel due to strong growth in modern trade (MT), e-commerce, and quick commerce over the past few months. This led to a strategic decision to correct the inventory in the GT channel, resulting in a temporary revenue decline, estimated to be in the high single digits for the India business.

However, the overall demand outlook remains positive for the second half of FY25. High inventory issues in the GT channel are not just limited to Dabur but are also seen across various brands due to the success of alternative channels, especially quick commerce. If the volume growth in the industry picks up in the second half of FY25, Dabur is expected to benefit from accelerated growth. The company anticipates returning to normal primary growth starting in October.

Given the recent decline in Dabur’s stock price, which is currently trading at a discount compared to competitors like HUL, Britannia, Marico, and Colgate, this presents a buying opportunity. Once growth stabilizes, Motilal Oswal sees potential for the stock to be re-rated.

Rural Market Expansion

Dabur is well-positioned for recovery in rural markets, with about 45-50% of its sales coming from rural areas. The company has nearly doubled its village coverage from 59,000 in FY21 to 122,500 in FY24, aiming to reach around 130,000 villages by FY25. With around 600,000 villages in India, Dabur has significant room for growth. Its distribution network covers about 7.9 million outlets, providing direct access to 1.42 million outlets. The company is also launching new, affordable products tailored for rural consumers to stimulate demand.

Growth in New Channels

Dabur is enhancing its visibility in modern trade and e-commerce. Currently, e-commerce contributes about 10% to the company’s sales, with quick commerce emerging as a fast-growing channel. The company is implementing programs like ‘Pragati’ to boost performance in standalone modern trade stores, which have resulted in double-digit growth. Emerging channels now account for about 25% of overall sales.

Mixed Results in Food and Beverages

Dabur’s beverages segment faced challenges in 1HFY25 due to heat waves in 1Q and heavy rains in 2Q. In contrast, the food category performed well, especially with strong results from the Homemade and Badshah brands. Dabur aims to generate ₹6-7 billion in revenue from Badshah over the next three years.

International Markets and Strategy

Dabur uses various distribution models globally to drive growth, aiming for double-digit growth by expanding Badshah into new markets and introducing region-specific products. The company focuses on natural products and tailored innovations to meet local needs, while also working to enhance its e-commerce presence and premium product offerings.

Valuation Overview

Dabur has effectively managed inflation impacts through cost control and operational efficiencies. With a broad distribution network and strong presence in rural markets, Dabur is well-placed to take advantage of the growing rural consumption trend. The company’s operating margin has been stable around 20% over the past several years, indicating potential for medium-term growth.

Motilal Oswal views the recent decline in Dabur’s stock price as an opportunity, given that the stock is trading at significant discounts compared to its peers. They maintain a “Buy” rating with a target price of ₹700, based on a price-to-earnings ratio of 50x for September 2026.