Weak volume growth spoilt the Dabur show in Q4; rural demand holds the key

Though revenue rose by 4.7 per cent, net profit declined during the January-March period

The biggest takeaway for investors in Dabur India’s March quarter (Q4) earnings is that a revival in rural demand is going to play a dominant role going forward. Especially as it has a 46 per cent share of the rural market, Dabur’s numbers are viewed as a barometer to gauge India’s rural demand. However, in anticipation of a lacklustre Q4, Dabur’s stock price came under pressure in Thursday’s trade. After the results were announced, the stock shed closed nearly four per cent lower than it did in the previous session.

The fast-moving consumer goods (FMCG) major clocked a measly 4.3 per cent year-on-year volume growth in Q4 — the lowest in the seven quarters and way below the Street’s conservative 6-8 per cent volume growth expectation.

A prolonged winter in the northern pocket of India hit the demand for summer-centric products, mainly in the food category — juices, for instance. And, liquidity-related issues at its distributors’ end were also a drag on the company’s overall volume growth. North India contributes 27-30 per cent to Dabur’s revenues.

The company’s revenues, at Rs 2,128 crore, rose by just 4.7 per cent year-on-year, while its operating profit dropped nearly six per cent to Rs 457 crore. Heavy promotional expenses incurred during the quarter played the spoilsport for the company. Adverse rupee movement, higher employee expenses due to employee stock options (ESOPs) and other expenses (mainly consultancy charges) also weakened Dabur’s operating profit. Operating margins, hence, fell by 240 basis points to 21.5 per cent in Q4. As a result, net profit, at Rs 370 crore — down 6.5 per cent year-on-year — took a further beating due to a one-off charge. Dabur wrote off goodwill in one of its Turkish subsidiaries in Q4.

For investors, given that Q4 was a quarter heavily impacted by one-offs, they could expect some relief, particularly on the profitability front, if the company’s efforts to scale up its margin-accretive premium products and e-commerce presence do the trick going forward. Impact of ESOPs, too, is unlikely to be felt in 2019-20.

Yet, these are positives only on the margins. The larger focus will be on a demand revival. In fact, with the management’s weak commentary regarding demand in the past, the Dabur stock has already seen a correction of nearly 11 per cent in valuations. Even before Thursday’s correction, the Dabur stock had shed about 10 per cent of its market capitalisation since February to trade at 38 times its estimated FY20 earnings.

“If the demand situation does not improve — mainly rural consumption — there are possibilities of a further valuation correction for Dabur going ahead. Situation, though, is expected to revive after the general elections,” says Naveen Kulkarni, head of research at Reliance Securities. The management, too, foresees that rural demand will get support after elections due to an improved rural infrastructure and cash flows.

However, analysts advise investors not to be lured by a correction in valuations. Unless there are visible signs of a pick-up in demand, investors should remain on the sidelines, experts advise.