Multi-year high margins lend comfort to Dabur; demand and sales to rise

Even as advertising spend was benign and aided margins, Dabur gained market share in 70-75 per cent of its domestic portfolio

The Dabur stock recorded a 52-week high at Rs 382.3 in Wednesday's trade, after the company posted its highest operating profit margin of 23.9 per cent, up 206 basis points (bps) year-on-year (y-o-y), in the March quarter. This was led by cost management and an improved product mix.

Operating expenses (excluding finance costs and depreciation) as a proportion of sales fell to 76 per cent, among its lowest; it was 78 per cent in the year-ago quarter. A fall in cost of raw material consumption propelled the gross margin, which expanded by 167 bps to 50.7 per cent. The management foresees a stable gross margin in 2018-19. It believes price hikes, if required, will help neutralise any inflationary pressure. 

Adjusted for the goods and services tax related-impact, sales increased by about 10 per cent over a year before in the quarter, and supported the margin performance (standalone sales were up 5.2 per cent). A recovering rural economy supported sales and pushed domestic volumes by 7.7 per cent. 

Although the low base of the past year helped, given the 2.4 per cent volume growth in the March 2017 quarter, the latest figure is higher than 6-7 per cent anticipated by analysts. Dabur earns 40-45 per cent of its domestic revenue from rural areas. Since its domestic business accounted for a little over 70 per cent of total revenue in the quarter, a rural recovery should be beneficial.

"We are witnessing early signs of revival in consumer sentiment, especially in rural India. Rural demand has been growing at a faster pace," said Sunil Duggal, chief executive officer.

Even as advertising spend was benign (up 2 per cent y-o-y) and aided margins, Dabur gained market share in 70-75 per cent of its domestic portfolio in the quarter. Its consumer care business, accounting for 82 per cent of revenues, grew by 8.2 per cent. Almost all consumer care categories such as oral care, hair care, skin care and others posted more than 8 per cent rise in sales. The management said its honey business, hit by Patanjali, grew by 23.7 per cent, and should soon be at its peak.

Despite a faster increase of 21.6 per cent over a year in tax expenses, consolidated net profit jumped 19 per cent y-o-y to Rs 3.97 billion in the fourth quarter.

Sales performance is likely to improve, with an expected rise of 8-10 per cent in volumes in the April-September period and then accelerate. "Favourable monsoons and a 

likely stimulus by the government as part of its overall thrust on rural growth is expected to boost rural demand. We will continue to invest in our brands to tap the 

growth opportunities and deliver profitable volume-led growth," added Duggal.

Overall, the management's optimistic commentary should auger well for the stock in the near term and support its rich valuation, analysts say.