Rural distribution expansion likely to keep Dabur in a sweet spot

Increasing rural reach would help Dabur achieve better growth than its peers despite weak demand, said an analyst

Despite the cautious commentary from the management on the demand front, the stock of Dabur gained about 2 per cent in intra-day trade on Monday, when the broader markets were under pressure, before closing 0.25 per cent higher.
 
While one reason could be that the stock had fallen after the results on Friday along with the markets, a relatively better growth outlook amid Dabur's focus on expanding its rural reach is what seems to have enthused the Street.
 
Nitin Gupta, analyst at SBICAP Securities, said: “Dabur’s efforts to expand its rural reach is on the right track. This will help the company achieve better growth than its peers despite a weak demand environment.”

After adding 4,000 villages in the June 2019 quarter (Q1), Dabur is planning to expand its rural exposure further by 7,000 villages to take the count to 55,000 by FY20. Analysts said most of these were high-revenue generating villages, and would help gain good traction for its power and high-margin brands. Dabur’s hinterland revenue share of 46-50 per cent clearly indicates the growth opportunity from the improving rural reach.
 
Besides, in order to lower its dependence on wholesale distribution, the company is planning to increase its direct outlets to 1.2 million by March 2020 from 1.14 million now.
 
Further growth support would come from a likely benign input cost trajectory and operating leverage as the company would reinvest margin gains towards higher advertising and promotion. While Dabur has guided for flattish 20 per cent Ebitda (earnings before, interest, tax, depreciation and amortisation) margin for FY20, it has revised its volume growth estimates. Analysts, thus, estimate it to report 7-8 per cent volume growth, compared to 11 per cent in FY19, and 10 per cent earnings growth in FY20.
 
In Q1, despite a demand slowdown and higher base (21 per cent volume growth a year ago), rural distribution expansion and focus on eight power brands (65 per cent of revenue) helped Dabur clock 9.6 per cent domestic volume growth — the highest so far in the FMCG space.
 
Better product mix, with faster growth of high margin health care products and operating leverage, led to a 157 basis point year-on-year expansion in Ebitda margin to 20.1 per cent in Q1.
 
However, costly valuation of 39 times FY21 estimated earnings (14 per cent premium to its historical five-year average) could limit the upside in the stock. Also, worsening demand conditions cannot be completely ignored. Thus, investors with some risk appetite can buy on corrections.