How will Badshah Masala fit into the Dabur gameplan?

When Dabur announced its quarterly results for the quarter ending September 2022, it also announced an interesting deal. Dabur announced that it had acquired a 51% stake in Badshah Masala (one of the leading Indian manufacturers of cooking spices) for a cash consideration of Rs587.50 crore. The entire deal is expected to be completed and consummated before March 31, 2023; that is within the current financial year itself. Of course, there are some caveats which make the deal subject to the terms and conditions inherent in the term sheet of the  share purchase agreement and shareholders agreement.

Dabur India (part of the Burman group) has already entered into a share purchase agreement and shareholders agreement with the existing promoters and shareholders of Badshah Masala Private Limited to buy a 51% equity stake. The balance 49% would be bought out by Dabur in phases over the next five years and it will eventually be fully absorbed into Dabur as a wholly owned subsidiary. It will be the first foray of Dabur into the large but rather unorganized market for Indian spices. That segment has some handful of organized players like Kitchen King, MDH and Ramdev already active in the area.

Let us look at the various aspects of the acquisition price. The acquisition of the 51% stake in Badshah Masala for a consideration of Rs587.52 crore would be less the proportionate debt. This deal values the company at an enterprise value of Rs1,152 crore. Based on the extrapolated numbers for FY23, the purchase price is around 4.5 times sales  and about 19.6 times EBITDA. That is a steep price, but it is a strong brand name in the Indian spices segment and gives Dabur a direct foray into the Rs25,000 crore market. The real opportunity lies as this segment goes from being unorganized to being organized. 

Dabur also plans to tie in the acquisition with its broader food strategy. Dabur has plans to expand its food business to Rs500 crore in the next 3 years and also expand into new adjacent categories. It will also mark the entry of Dabur into the Rs25,000 crore branded spices and seasoning market in India. The actual opportunity could be much bigger if you also consider the unorganized market and that is where the real cream of growth lies. Spices is a product where it has to be a mix of taste and consistent quality. While Badshah has built the franchise, a bigger balance sheet like Dabur will make the growth smoother.

Overall, the transaction is expected to be Cash EPS neutral in the first year but it is likely to be value accretive after that. The opportunity cannot be missed. After all, branded spices market in India is growing at healthy double digits and could see geometric growth as consumption improves. This will also complement the food portfolio of Dabur and help them complement the household thali. The real potential in the business is not just the expansion of the organized spices market but the transformation of the unorganized spices market into an organized market. That is going to be bigger and also low hanging.

According to a recent report by Avendus Research, Indian spices market is estimated at Rs70,000 crore. Out of that just about 35% of Rs25,000 crore is in the organized segment and rest of the spice market is local in nature. However, by 2025 the branded spices market is likely to double to Rs50,000 crore. It is this phenomenal growth that Dabur is looking to tap through this acquisition. This is interesting since FMCG players have traditionally stayed away from this segment due to the commoditised nature of this business. But all that could be in for a drastic rehaul as big names like HUL and Dabur enter the spices fray.