Despite strong growth, Dabur stock may hit the valuation roadblock

The management is confident of double digit sales growth and steady margins in FY22

Dabur India delivered a strong beat in its June quarter performance. Its guidance for FY22 too was positive with double digit sales growth and scope for margin expansion. Despite these triggers, the stock corrected over 4 per cent in trade on account of high valuations and volatility in the growth trends. Prior to the fall today, the stock had gained 19 per cent from its lows in February outperforming its peers.

Says Ashit Desai of Emkay Global Research, “Dabur’s growth initiatives remain aggressive, offering an improved growth outlook. However, likely moderation in healthcare ahead and higher effective tax rate limit upsides to our forecasts. After the recent run-up, valuations at 48 times FY23 earnings per share offer limited upside potential.”

While valuations are on the higher side, the company delivered healthy growth rates across key categories. Backed by strong execution, overall growth was at 32 per cent over the year ago period. Though it was on a low base, the beat on expectations indicates a limited impact of the Second Wave.

What stood out was growth in the beverage business, traction in the healthcare portfolio and market share gain in home and personal care categories. Healthcare saw 30 per cent growth led by Chyawanprash and Honey; this is the fifth consecutive quarter of over 20 per cent sales growth for the business. The company is looking at posting mid-to-high single digit sales growth though it will have a high base to contend with in the coming quarters in this segment.

In the foods segment a low base and introduction of new products and share gains in juices helped it to outperform the sector with a growth of 80 per cent.   While June quarter growth was strong, analysts point out that domestic volume growth on a two-year average basis has been volatile; after a 12 per cent growth in Q3,FY21 growth slipped to 5 per cent in Q4FY21 before recovering to over 10 per cent in the June (Q1FY22) quarter.

The international business which accounts for 26 per cent of June quarter sales too posted a robust 34 per cent growth at constant currency.

The company is expected to post double digit growth in FY22. Says Himanshu Nayyar of Yes Securities, “Despite the high base for the remainder of the year, a pick up in rural growth and strong execution are likely to result in 11-12 per cent growth in FY22.” He however adds that the key overhangs would be a moderation in healthcare portfolio and pressure on margins which can constrain the new product development pipeline. Among the triggers going ahead is a possible foray into household insecticides, increased aggression in the hair oils space and continued steam of new products. This, according to analysts at JM Financial, could keep the street excited about the stock.

Despite the correction on Wednesday, investors should await sustainable volume gains, expansion of market share and margins over the next few quarters before considering the stock.