Dabur's 'Spicy' Growth Strategy to Acquire Majority Stake in Badshah Masala

The spices and masala segment in India is becoming "hotter" with the entry of large FMCG companies in this category.

Over the past few years, FMCG companies have been acquiring well-known regional spices and masala brands, in a bid to gain a foothold in this segment.

Spices and masalas are an integral part of Indian families' daily cooking requirements. The growth opportunities are also reflected in the "spicy" valuations paid by FMCG companies for acquiring companies in this segment.

Earlier this week on Tuesday, Dabur announced the acquisition of 51% stake in the well-recognised Mumbai-based Badshah Masala for Rs 5.9 bn. This is an enterprise value (EV) to sales of nearly 6 times of financial year 2022 revenues of Rs 1.9 bn.

The company in a press release highlighted that they are paying nearly 4.5 times on EV to sales on annualised estimated current financial year revenues of Badshah Masala.

Earlier, in May 2020, FMCG major ITC had bought a 100% stake in Sunrise Foods for Rs 21.5 bn or about 3.6 times fiscal 2022's turnover of Rs 5.9 bn. Sunrise Foods is well established in the eastern region.

Coming back to Dabur's acquisition...

In a press statement, Mohit Burman, chairman, Dabur India, said,

The Indian spices and seasoning category is a large and attractive market.

Badshah Masala is one of the key players in this space and will accelerate our growth strategy as we continue to build our foods business.

Dabur has also highlighted that it intends to expand its turnover in the foods and allied category to Rs 5 bn over the next three years.

The annual turnover of the branded spices segment is estimated at over Rs 250 bn. With a distribution reach across the country, Top FMCG companies like ITC and Dabur can make spices available at neighborhood kirana stores akin to soaps and shampoos.

How FMCG stocks have performed recently

FMCG stocks have been in the limelight lately with several stocks in this segment trading close to their 52-week high.

ITC ended Tuesday's trade at Rs 346 and not too far from its 52-week high of Rs 354.

Meanwhile, Dabur ended Tuesday's trade at Rs 532, while its 52-week high was Rs 620.

Today, the stock is trading 1.2% higher at Rs 538.4 after the acquisition was announced.

Over the last one year, share price of Dabur has underperformed peers and lost 9%.

Comparative Analysis of FMCG Stocks

Company	Dabur	Emami	ITC	Godrej Consumer	HUL
ROE (%)	22.1	44.3	25.9	17.0	18.4
ROCE (%)	26.8	33.7	33.8	18.7	24.8
Latest EPS (Rs)	9.8	18.9	13.9	16.8	41.1
TTM PE (x)	54.1	25.2	24.9	49.0	61.0
TTM Price to book (x)	10.9	9.8	6.5	7.1	11.9
Dividend yield (%)	1.0	1.7	3.3	0.0	1.4
Industry PE (x)	54.1
Industry PB (x)	10.9
Share Price Performance (%)
Company	Dabur	Emami	ITC	Godrej Consumer	HUL
1 Month	-5%	-5%	3%	-7%	-7%
3 Months	-6%	2%	14%	-3%	-3%
YTD	-8%	-8%	59%	-15%	6%

Data Source: Equitymaster, Ace Equity

With the global economy showing signs of a slowdown due to rising interest rates and the Russia-Ukraine war, investors have been flocking to the "relative safety" of the domestic focused FMCG stocks.

FMCG sector is an evergreen sector. It co-relates with India's consumption theme.

You rely on FMCG products every day, be it daily essentials such as food and beverages, or household and home care products such as paper goods and cosmetics.

However, do note that FMCG is a sector that fluctuates the most with the tiniest disruption in the market.

With ITC trading at 23.6 times estimated FY23 earnings and for Dabur at nearly 48 times, the near term growth opportunities appear to be priced in by Dalal Street.

As we're talking about FMCG stocks, do check out the below video where India's #1 trader, Vijay Bhambwani, talks about why the FMCG sector will outperform the market.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...