Motilal Oswal has reiterated its BUY recommendation for Dabur India with an upside potential of 23%, setting a revised target price of Rs. 700. Despite challenges in Q2FY25, the company remains well-positioned for recovery in the second half of the year, especially driven by the improving rural economy and steady growth across emerging channels such as e-commerce and modern trade. Dabur's strategic initiatives, product innovations, and robust distribution network make it a solid contender in the FMCG space. The recent stock price correction presents an attractive opportunity for investors.

Q2FY25 Performance and Outlook

Revenue Decline in Q2 Due to Distribution Adjustments
Dabur faced a high single-digit revenue decline in India for Q2FY25, primarily due to strategic adjustments in the General Trade (GT) channel. This was necessitated by high inventory levels in modern trade, e-commerce, and quick commerce channels, which impacted distributor return on investment (ROI). While the company’s out-of-home consumption was affected by heavy rains and floods, the overall demand outlook for 2HFY25 remains positive.

Positive Momentum Expected in 2HFY25
Dabur has indicated that growth should normalize from October 2024 as inventory issues stabilize, and the company expects strong demand in the rural market driven by above-average monsoons and rising incomes. The rural recovery is expected to support volume growth, and Dabur’s expanding village coverage, now reaching 122,500 villages with plans to hit 130,000 by FY25, positions it to capitalize on this opportunity.

Strengthening Rural Presence

Strategic Rural Expansion
Dabur’s rural reach stands at 45-50%, second only to Emami among Indian FMCG companies. Over the past three years, Dabur has almost doubled its village coverage from 59,000 in FY21 to 122,500 in FY24, targeting further expansion to 130,000 villages by FY25. This expansion is supported by the company's broad distribution network, which covers 7.9 million outlets with direct access to 1.42 million outlets.

Affordable Product Offerings
Dabur has also been focusing on affordable, rural-specific product packs across categories to boost demand in rural areas. This strategy aims to cater to the unique needs of rural consumers, ensuring product accessibility and affordability.

Robust Growth in Emerging Channels

Strong Performance in E-commerce and Modern Trade
E-commerce now contributes 10% to Dabur’s overall sales, with quick commerce showing rapid growth as the fastest-growing sub-channel. Modern trade has also witnessed double-digit growth, bolstered by Dabur’s initiatives to improve visibility and availability in standalone modern trade outlets.

Channel-specific Initiatives
Dabur’s Pragati program is designed to boost performance in modern trade stores. The company continues to focus on new initiatives across emerging channels, which now contribute around 25% to total sales.

New Product Launches and Innovation

Focus on Premiumization and New Categories
Dabur continues to invest heavily in R&D, with INR 442 million allocated for FY24, resulting in 14 new product launches. These include entries into high-growth categories such as mosquito repellents, cooling hair oils, and gel toothpastes. The company’s Digital First brands have collectively generated over INR 1 billion in turnover, contributing to the overall innovation-led growth strategy.

Margins and Profitability Outlook

Expected Margin Expansion
Dabur's gross margin, which has been under pressure due to rising commodity prices, is expected to stabilize in the medium term. This is supported by cost-efficiency initiatives and premiumization efforts. As commodity prices stabilize, Dabur’s EBITDA margin is expected to expand from 19.4% in FY24 to 19.9% in FY26.

Focus on Healthcare Segment
The healthcare segment, which is more profitable than other segments, is expected to play a significant role in boosting overall margins. Products like Dabur Glucose and Hajmola are seeing strong demand, with health juices expected to contribute INR 500 million to revenue in FY25.

Key Growth Drivers

Healthcare Portfolio
Dabur’s competitive edge lies in its strong healthcare portfolio, which includes Ayurvedic products and health supplements. The company expects high single-digit growth in this segment, supported by rising consumer preference for Ayurvedic products and the successful expansion of value-added products.

Oral Care and Hair Oil Performance
The oral care segment continues to perform well, posting double-digit value growth and high single-digit volume growth. However, in the hair oil segment, while coconut oil remains strong, Dabur Amla faces challenges due to price cuts and competition. To counter this, Dabur plans to focus on premiumization and sub-segment expansion within hair care.

Valuation and Recommendation

Maintain BUY with a Target of Rs. 700
Motilal Oswal has maintained its BUY rating on Dabur India, with a target price of Rs. 700 based on a 50x P/E for September 2026 estimates. At the current market price of Rs. 567, the stock trades at a 52.4x P/E for FY25E and 45.4x for FY26E, offering significant upside for long-term investors.

Attractive Valuation
Dabur trades at 16% and 14% discounts to HUL and Britannia, respectively, on FY26E P/E, making it an attractive investment option. Once Dabur’s growth trajectory improves, there is potential for a re-rating in the stock.

Key Risks

Macroeconomic Headwinds
Dabur faces potential risks from rural slowdown if monsoons underperform or government spending in rural areas weakens. Additionally, any further commodity price inflation could pressure margins.

In summary, Dabur India remains a compelling investment opportunity due to its robust distribution network, strategic rural expansion, and growth in emerging channels. Despite short-term challenges, the company’s long-term outlook remains promising, supported by product innovation and an expanding healthcare segment. Investors are encouraged to maintain a BUY position with a target of Rs. 700.