Margin blues mar Dabur’s Q4; valuations tagged to growth
Dabur India Ltd’s pre-quarter update in early April for the three months ended March (Q4FY23) had lowered expectations from its results. But the company has disappointed even on those muted expectations. Consolidated Ebitda margin has contracted year-on-year by as much as 271 basis points (bps) to 15.3%. In its update, Dabur had said it was expecting Ebitda margin drop within 200-250bps range.
Certain one-off expenses are responsible for the sharper drop in Ebitda margin in Q4. In its earnings call, the management said it incurred one-off expenses of ₹20-25 crore plus additional expenses. Also, the product mix was unfavourable. Note that advertisement and publicity expenses in Q4 were flattish. Other expenses, excluding advertisement, rose by almost 21%. With this, Dabur’s Ebitda margin has fallen y-o-y consistently for the past five quarters, hitting a multi-quarter low in Q4.
For the year as a whole, Dabur’s Ebitda margin fell by about 190bps to 18.8% in FY23. One factor that drove this decline is raw material inflation, which stood at 12.6%. There has been some softening of commodity costs recently. However, Dabur has said while operating profit margin will inch up, it may not go up to 20% level in one year at least.
Dabur aims to prioritize advertisement spends to boost demand. It plans to increase advertisement expenses as a percentage of revenue to 7-8% from 5.6% in FY23. Growth in the relatively low margin foods business is expected to moderate ahead and this could offer some relief on the margin front. But the international segment continues to see margin headwinds. Taking these factors into account, Ebitda margin target for FY24 stands at 19-19.5%.
On the brighter side, Dabur has gained market share across some product categories. For instance, in the hair oils portfolio, the company’s market share improved and touched the highest ever mark of 17%.
Also, Dabur noted some green shoots in rural recovery towards the end of Q4. Note that rural growth lagged urban in Q4. It goes without saying that faster rural recovery would improve Dabur’s growth outlook, which would boost investor sentiment. Dabur’s shares closed 1.4% lower on Thursday, a day when the Nifty 50 index was up nearly 1%. The stock’s valuation at about 38 times FY25 estimated earnings based on Bloomberg data is not demanding. But for valuations to expand, meaningful growth is the need of the hour. Unfortunately, the outlook on that doesn’t seem upbeat, for now.
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