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Await rural acceleration

Dabur reported a weak show in 4QFY19, as the performance was marred by seasonality impact and slowdown in rural offtake (unlike previous elections). We cut our EPS by 4% for FY20-21E owing to a delay in rural acceleration and weakness in international biz. We believe the govt. will focus on reviving rural consumption, making Dabur the best play (particularly after the recent stock correction). Our TP is at Rs 464 based on 38x FY21E EPS.

HIGHLIGHTS OF THE QUARTER

* Domestic revenue/volume grew at 6/4% (13/11% in FY19) vs. our exp of 9.5/6%. Adjusting for 6% degrowth in beverage portfolio, domestic revenue grew by 8.5%. Dabur gained market share in all its categories except for Home care and Skin care (12% combined revenue mix), reflecting continued weakness in competitive intensity (mainly from Patanjali).  Mohit Malhotra’s (new CEO) focus is on consolidating A&P investments i.e. disproportionate investments on power brands (like Dabur Amla, Dabur Red, Real etc.) instead on marginal brands. The mgt. believes that these power brands (strong brand equity) have a large addressable market and hence there is an opportunity to gain scale with increased support from investments.

* International business (27% revenue mix) grew by 2% owing to continued slowdown in MENA region and currency devaluation.

* EBITDAM declined by 238bps to 21.5% driven by 95bps decline in gross margins (limited price hikes) and 34/10% growth in employee/other expenses. APAT declined by 6% to Rs 3,717mn vs. exp of Rs 4,266mn.

STANCE

Dabur is enjoying a renewed consumer fad in ‘naturals’ across its portfolio with limited competitive intensity. Dabur’s success in FY20-21E will depend on how the co. capitalizes on this opportunity based on (a) Success of new launches, (b) Scaling power brands, (c) Marketing strategy (d) Deeper distribution (rural markets) and (e) Recovery in rural demand. Post the recent correction in the stock, we believe the ask rate is not demanding. New CEO on board would lead to a rejig in the co’s strategy and may result in short term pain for long term gain. We advise investors to look at the stock from a medium-long term perspective.

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