Dabur's margin gains make up for revenue

Supply issues, slowdown take toll

Dabur’s domestic volume growth fell to five per cent in the September quarter, its lowest in 24 quarters. This was due to slowing urban general trade, delayed festive season, supply issues, and lower stocking. Revenue growth of 8.7 per cent year-on-year to Rs 2,092 crore was at a multi-year low and short of Bloomberg consensus estimate of Rs 2,127 crore.

Strong double-digit annual growth in its hair oils segment was offset by the shampoo one.

Lower institutional sales hit chyawanprash (jam-like mixture) volumes. Ethicals and juices segments posted moderate growth — the latter hit by supply disruptions in Nepal. While the management is hopeful of Nepal issues sorting out in a few days, it is stepping up innovation across categories. International business (a third of consolidated revenues) grew 8.8 per cent, in line with recent trends. Growth is likely to be better in the second half of FY16, and should support overall numbers.

Though rural demand and departmental store growth was strong, Dabur believes underlying rural demand is weak for the sector. It remains cautious and believes domestic demand revival will depend largely on the festive season.

A positive in the quarter for Dabur was profitability. Healthy Ebitda ( earnings before interest, taxes, depreciation, and amortisation) margin expansion, coupled with higher ‘other income’, aided Dabur’s net profit, which grew 18.7 per cent year-on-year to Rs 341 crore and exceeded an estimate of Rs 332 crore.

Margins were aided by lower input costs (down 531 basis points year-on-year to 36 per cent of sales) and limited increase in advertising spends (up 14 basis points year-on-year to 13.3 per cent). The Ebitda margin expanded 170 basis points to 21.9 per cent. Even as margin upsides appear limited, they are unlikely to fall much, as input costs are likely to remain gentle in the second half.

Against this backdrop, the stock’s valuations at 33 times the FY17 estimated earnings are not cheap.