Rural recovery, robust volume growth help Dabur post incremental gains

Its ability to maintain margins will depend on the raw material cost basket

Aided by robust volume growth and a resilient rural segment, consumer major Dabur India delivered in-line revenue performance in the June quarter. Barring health supplements, which came off a high base and saw a steep 35.5 per cent drop over the year-ago quarter, large segments such as foods, hair care and oral care saw sizeable growth in the quarter.

Consolidated sales growth of 8 per cent was largely on account of domestic performance (up 9.3 per cent) even as international revenues, which account for 24 per cent of revenues, were flat due to unfavourable currency translation impact.

Despite a higher base, domestic volume growth at 5 per cent was better than most peers and came on the back of market share gains across key categories of fruit drinks, foods and beverages, and hair oil. Average three-year value and volume growth were also at a strong 8-10 per cent band.

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Analysts led by Krishnan Sambamoorthy of Motilal Oswal Research said, “Despite unusual sales in the healthcare business during the Covid-related lockdown period coming off, the overall sales growth trajectory is in the double-digit compounded annual rate and is a continuation of the turnaround seen by Dabur under the new chief executive officer.”

What stood out in Dabur’s performance in the quarter was the strength of the rural market. While most home and personal care majors reported a sluggish trend of rural growth given muted demand, Dabur management has been positive. Expansion of rural distribution helped the company achieve growth similar to the urban segment (8.3-8.4 per cent each). The company indicated that the rural outlook is positive, given normal monsoon and minimum support price increase, which would improve the profitability of farmers. Urban recovery would be aided by softening of inflation and growth in new-age channels.

Analysts led by Amnish Aggarwal of Prabhudas Lilladher Research believe the long-term outlook for the company remains intact, driven by an innovation-led growth strategy with a focus on eight core brands, higher market share in foods and beverages/hair care, low unit price innovations, strong rural distribution and 4-5 per cent incremental sales from e-commerce innovations.

While growth should be strong, investors will track the margin trajectory. Raw material inflation and an unfavourable product mix led to a 225 basis points drop in gross margins while margin loss at the operating profit level was low by 190 basis points due to a fall in advertising spending, and employee costs.

Gross margins are expected to be under pressure in the current quarter (Q2) before improving in the second half of the financial year due to softening raw material prices and pass-through of price hikes. The company expects to maintain margins on an annual basis if commodity prices, especially crude oil continue to soften.

At the current price, the stock is trading at 43 times its FY24 earnings estimates. Given that most brokerages have a target price of around Rs 600 per share, there is limited upside from these levels. Investors should await more attractive entry points.