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Volume growth of 4% and a first LFL quarterly EBITDA decline in 14 years (there were some one offs though) were highlights of 4Q. Company cited category deceleration (rural distress, liquidity crunch) as the reason, we agree, though the magnitude is surprising for consensus including us. It continued to gain market share in core – hair oils (+70bps), juices (+540bps) and oral care (+45bps) - we expect the trajectory to continue. Volume momentum is likely to accelerate in the medium-term driven by the strategic initiatives under the new CEO. We continue to like the Dabur story except valuations (EBITDA multiple of 36x FY20 is at par with HUL – implying Dabur’s India business trades at a premium to HUL). However, it's the defacto "ayurveda / naturals play" in India and we expect premium valuations to sustain. Retain BUY though near-term visibility is low.
* Weak performance driven by rural slowdown, prolonged winter:
Consolidated sales grew 5% but EBITDA declined 6% (first time in 14 years – ex-demonetisation and GST). Domestic FMCG sales grew 6% – double digit growth in most segments was offset by weak performance in foods (-6%) and hair care (+3%). Domestic FMCG volume growth moderated to 4% led by demand slowdown (due to rural distress and liquidity crunch) and prolonged winter (impacted hair oils and foods segments). International business grew just 2% due to continuing weak macro in MENA region and adverse currency in Turkey, Nigeria and Pakistan.
* Margin pressure primarily from increased competitive intensity:
Consolidated EBTIDA margin declined 240bps to 21.5% led by (1) one off factors like low staff costs in base and margin impact from International business due to devaluation of currency and (2) competitive pressures in hair care, foods, home care and skin care.
* Strategic initiatives under new CEO inspire confidence:
We expect medium-term volume momentum to improve to high-single digit driven by even better execution under new CEO. Key growth drivers are (1) more focused execution under the power brand architecture, (2) go-to-market strategy (increasing direct reach and reducing dependence on wholesale), (3) Regionalisation and (4) capability building.
* Valuation and risks:
We cut earnings estimates by 11-12%; modelling revenue / EBITDA / PAT CAGR of 13 / 16 / 12 (%) over FY19-21E. Maintain BUY rating with DCF-based revised target price of Rs460 (earlier Rs520). At our target price, the stock will trade at 43x P/E multiple Mar-21E. Key downside risk is prolonged slowdown in rural demand.
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