FMCG major Dabur India's healthy run comes riding on growth triggers

Distribution, new product contribution, and portfolio expansion are positive

Notwithstanding multiple headwinds on the rural demand and commodity cost fronts, fast-moving consumer goods major Dabur India met Street estimates for the December (Q3FY22) quarter. Also, its market-share gains across categories, foray into new segments, such as snacks, and distribution expansion are expected to help the company maintain a healthy growth rate.

The stock is up over 4 per cent in the past two trading sessions, the biggest gain across the Nifty FMCG constituents.

The resilient performance in Q3 despite a higher exposure to the slowing rural market is positive. The company outperformed its peers in the rural market with 7.5 per cent growth, which was 500 basis points higher than the urban segment. This came on a higher base of 25 per cent with the growth acceleration coming on the back of improvement in rural distribution. The rural segment accounts for 46 per cent of Dabur’s domestic sales; the company increa­sed its presence from 55,000 villages to over 88,000 in the nine months of FY22.

Market share gains across all categories is another positive that was highlighted by the company’s CEO, Mohit Malhotra, in a post-results call. One of the categories that has done well according to the management is the food and beverage segment, which posted growth of 38 per cent. The juices and nectars segment (Real brand) within this gained 540 basis points in the market share in the quarter, mainly because of the rising coverage of modern trade outlets in south and west India.

Similarly, the company gained market share in the toothpaste (50 basis points), shampoo (40 basis points) and home care (Odonil and Odomos; 40-50 basis points) segments. Dabur has also made gains in the e-commerce segment and modern trade channel where it had been lagging peers.

The share gains should add to the growth momentum for the company.

Analysts led by Jaykumar Doshi of Kotak Institutional Equities say: “Dabur’s market leadership in multiple categories (chyawanprash, honey, bleaches, juices, and mosquito repellent creams) accounts for about 60-65 per cent of the portfolio. This positions it well to drive pricing growth and protect margin in an inflationary environment.”

Though the company posted 7.8 per cent YoY growth in revenues, aided by price hikes, the gross margin was under pressure as it fell 200 basis points to 48.3 per cent. Still, Dabur was able to expand its operating profit margin by 30 basis points to 21.3 per cent.

While raw material inflation is expected to be high in the current quarter, analysts led by Krishnan Sambamoorthy of Motilal Oswal Research expect the gross margin to improve sequentially as price hikes in the December quarter are expected to be followed by another round of hikes. Dominance in several categories has allowed the company to take price hikes and resulted in a margin impact lower than that seen in peers, they add. The ongoing cost savings programme and higher top-line growth are expected to support margins.

The company has been aggressive with its new product development pipeline. It had over 100 new launches in the past seven quarters and is expected to sustain the growth trend. The company has created three sub-brands within Real: Fruit Power (fruit-linked beverages), Milk Power (value-added dairy) and Real Health (salty snacks). It has also expanded its addressable market size in segments, such as juices and nectars, from Rs 1,500 crore to Rs 10,000 crore, venturing into the generic drinks category.

Given the strong execution, ahead-of-the-market growth in a difficult environment, and the addition of new categories, Nirmal Bang Research has upgraded the stock to “buy” from “accumulate”.

At the current price, the stock is trading at 41 times its FY24 consensus earnings estimate. Though the valuation is at a premium, analysts believe it is sustainable, given the multiple initiatives by the management to support growth.