Dabur: Nepal border issue to hurt volume, again

Near-term pressures, valuations could restrict stock performance

After disappointing the Street with lower volume growth in the September quarter, Dabur India’s woes are likely to continue in the December quarter as well. Closure of Indo-Nepal border is the key reason behind its volume growth miss in the previous quarter. Dabur derives nearly 40 per cent of its juice (REAL fruit juices) manufacturing from its Nepal subsidiary, estimate analysts at JP Morgan.

In the past quarter, while the overall volume growth was 5.5 per cent, this metric was higher at seven per cent if one were to exclude the juices segment. Given that the political disturbances are continuing, the company management expects to report sub-five per cent volume growth in the December 2015 quarter.

The company gave a copy of chief executive officer Sunil Duggal’s interview with a television channel to the exchanges on Friday, where he said while juices revenues was hit severely in October and November, but things have started improving in December.

He estimated the total revenue loss in the December quarter to be about Rs 100 crore (revenue loss, loss on demurrage of raw material, loss of Nepal domestic sales, among others) in the juice business due to the Nepal issue. Analysts believe the company can source about 50-60 per cent of juice demand from the Sri Lanka plant, while rest could come in from plants in Newau, Rajasthan and also by engaging with third parties.

While they expect juice sales to fall 10-15 per cent on a year-on-year basis in the December 2015 quarter, management remains hopeful of returning to normal growth rates (five per cent plus volume growth) in the March quarter.

However, seasonally lower demand for juices in winter till the onset of summer could restrict improvement in juices revenues to some extent. Though overall demand trends show no signs of meaningful impact yet, management believes FY17 will be a better year as compared to FY16.

Its other businesses such as oral care, OTC and ethicals, digestives, hair care, home care continue to do reasonably well so far. Despite the near-term pressures from Nepal, most analysts continue to be positive on Dabur given its strong earnings visibility, on-going distribution expansion as well as innovation.

The scrip currently trades at 32 times FY17 estimated earnings, indicating that valuations are not cheap. Also, post the management warning, analysts could trim their full year estimates for the company, keeping the stock price under check.