Dabur’s domestic biz prospects hinge on rural demand revival
Fast-moving consumer goods companies Marico Ltd, Godrej Consumer Products Ltd and Dabur India Ltd have released their pre-quarter update for the three months ended 31 March (Q4FY23). Shares of Marico and Godrej have been flattish since the business update. However, Dabur’s shares fell 4% on Thursday as the update lagged investor expectations with margins being a key disappointment. Overall, the update paves way for earnings cut for FY23.
Analysts were pencilling in Dabur’s Ebitda margin to expand year-on-year (y-o-y). Instead, the measure is likely to drop by 200-250 basis points (bps), according to the company. Note that Ebitda margin for the corresponding period of last year was at 18%.
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The weak margin performance comes even as commodity inflation has cooled off to a good extent. This is mainly due to two factors. One, currency headwinds in Dabur’s international business are hurting gross margins. Two, Dabur increased its advertisement spends in Q4, aggravating the drop in Ebitda margin. For the first three quarters of FY23, Dabur’s Ebitda margin has contracted by 130-190 bps y-o-y.
To be sure, given that Dabur’s international business is relatively smaller, the bigger worry is muted demand in rural India. In their respective March quarter updates, both Dabur and Marico highlighted subdued rural sentiments. A rebound in demand in rural India will be crucial for Dabur, as it derives a bulk of its revenue from these regions. In its India business, Dabur expects to post mid-single-digit revenue growth. Its food and beverage business and the healthcare portfolio are on strong footing. However, the personal care category will be hit by a demand slowdown.
It is likely that volume growth could disappoint. For perspective, Dabur’s India business saw a 3% drop in volume in Q3 while revenue grew by about 3% y-o-y.Dabur expects consolidated revenue in Q4 to grow in mid-single digit y-o-y. This compares to Kotak Institutional Equities’ estimate of 8% .
Going ahead, there is a silver lining as Dabur sees some green shoots such as moderating inflation, improving consumer confidence, and higher government spending. Separately, Q4 will also see the consolidation of Badshah Masala business. As such, key triggers for the Dabur stock include a recovery in rural demand, better -than-expected volume growth and improvement in margin. So far this calendar year, Dabur’s shares are down 6%. The stock trades almost 43 times its FY24 estimated earnings, as per Bloomberg data. Valuations can drop if rural demand recovery is slower.
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