Narrative (agile, innovative) vs. Reality of earnings cut
Dabur's 4Q results missed consensus (to be fair, company had previously guided for a difficult print; hence blame consensus' estimation skills). Its 14% volume decline may appear high, though we reckon it’s mathematically explainable - (1) for any non-seasonal FMCG product, 1 day in a quarter = 1.1% of quarterly revenues - that's ~9%, (2) seasonal 'trade loading' of Juices etc. missed in March-end ~5%. We continue to see three pillars to Dabur story, (1) strong innovation pipeline (new products at ~3% of revenues), (2) likely cost reduction measures yielding ~150bps of operating margins (which may be redeployed for growth), (3) a culture change with a bias for action under Mohit Malhotra, CEO. That said, we continue to see headwinds of second-order impact of likely lower economy growth, downtrading, wholesale channel challenges etc. ADD.
Dabur has been quick to realign beyond power brands and dial up innovation in health & hygiene. Increasing contribution of new launches (tripled to 3% in FY20) showcases change in company philosophy. We like the agility displayed in changing go-to-market approach (automating sales order taking) and reimagining path to purchase. Direct reach in rural (52,700 villages through 12,000 sub-stockists) protects from adverse impact of wholesale channel being under stress. That said, we expect headwinds in international (25% revenue contribution) due to severe economic slowdown in crude-linked economies (Middle East).
* Adjusted revenue growth at 5% YoY:
Consolidated sales / EBITDA / PAT declined 12% / 23% / 5%. Domestic FMCG sales declined 17% with 15% volume decline. Management estimated the COVID-lockdown impact at Rs 3.6 bn on revenues and Rs 1.15 bn on PAT in Q4. In the two months of the quarter (Jan-Feb), domestic volume growth was at 5% and international business growth was at 8% - overall consolidated revenue growth at 5%. Dabur continues to expand its distribution reach – targeting reaching 60,000 villages by Mar’21 and increasing direct reach to 1.5 mn in 2-3 years from 1.2 mn currently.
* International business:
Revenue was flat in Q4, strong performance in Egypt (+14%), Turkey (+48%), Namaste (+11%), Sub-Saharan Africa (+17%) were offset by MENA (-8%; COVID and macro headwinds) and SAARC (-24%; lockdown impact)
* Profitability impacted by negative operating leverage:
EBITDA margin declined 260bps YoY to 18.9% driven by (1) lower gross margin (-70bps) and (2) negative operating leverage – employee cost up 100bps, ad-spends up 80bps and other opex up 20bps.
* Balance Sheet:
Dabur’s cash generation took a hit given the weak performance (FY20 revenue / EBITDA grew 2% / 3%). OCF grew 8% to Rs 16 bn but FCF declined 6% to Rs 12 bn. Working capital remained stable at 30 days (Mar’20).
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