Dabur: Domestic biz disappoints

Q2 margins managed by cutting ad spend, but analysts say this may not be sustainable.

Over the last few quarters, Dabur has been hit on multiple fronts. For one, analysts say that from a strategic point of view, the company hasn’t invested enough in new products. Second, it has cut on ad spends, affecting its volumes. A major worrying trend the company has reported is deceleration in rural sales.

While Dabur’s revenue jumped 29.8 per cent year-on-year to Rs 1,260 crore in the second quarter, volumes grew 4.5 per cent in the domestic business. According to Edelweiss Capital, a slowdown was felt in the shampoo, homecare, skincare and digestive and babycare segments. Despite the contraction in margins, the company managed to grow the earnings before interest, tax and depreciation by 15.1 per cent annually. But, the contraction was largely offset by lower advertising spends.

Analysts say this isn’t sustainable, as the company has already suffered in terms of volume growth on tighter advertising and promotional (A&P) spends. While it spent 8.3 per cent of sales on A&P in the second quarter, the figure stood at 11.9 per cent in the same quarter last year. According to Manoj Menon of Kotak Institutional Equities, the ad spend moderation in the first half has likely hurt the company’s sales growth and it is left with no choice other than increasing it in the second half.

Apart from haircare, which grew 16 per cent, most other categories have clocked single-digit growth. While shampoo sales declined 25 per cent, oralcare sales grew six per cent y-o-y. Toothpaste and toothpowder sales grew eight per cent and two per cent, respectively. According to Kotak, the micro-marketing strategy adopted by ITC, HUL and P&G is possibly hurting Dabur.

The company’s commentary on rural sales has worried analysts, as they have shown a decline. Given that rural sales are slow this year, the forthcoming quarters could also see some pressure. Analysts say the company has followed both organic and inorganic routes to expand internationally, which seems to be working well, so far.

According to Edelweiss, at 22.8 per cent, organic growth in the international business division was robust despite political disturbances in West Asia. The 8.4 per cent y-o-y growth in net profit to Rs 170 crore was mainly helped by the acquisition of Hobi and Namaste. However, a section of analysts maintains the jury is out on the company’s international operations. For now, what analysts like about the stock is the fair valuation among the entire FMCG pack.