Disappointing results, fair valuations limit upside
Brief view on results and stock
* Dabur’s 4QFY20 weak results were followed by muted management commentary on the near term outlook. We also expect an impact on FY21 earnings owing to its high dependence on wholesales and on the profitable MENA business getting affected by the sharp crude price decline.
* Valuations are fair (43.7x FY22E EPS) and prevent us from turning more constructive on the stock. Maintain Neutral.
Disappointing results; 14.6% volume decline in domestic FMCG business
* Dabur’s 4QFY20 consol. sales declined 12.3% YoY to INR18.7b (v/s est. INR22.7b). EBITDA declined 23% YoY to INR3.5b (v/s est. INR4.7b). PBT was down 22.4% YoY to INR3.6b (v/s est. INR4.8b). Adj. PAT declined 31% YoY to INR3b (v/s est. INR3.6b). FY20 consol. sales/ EBITDA/ Adj. PAT grew 2%/ 3%/ 1.5% YoY.
* Gross margins contracted 70bp YoY to 49.1% (v/s est. 50.7%). EBITDA margin contracted 260bp YoY to 18.9% (v/s est. 20.6%) in 4QFY20.
* Standalone sales/EBITDA/adj. PAT declined 17.3%/ 24.3%/ 38% YoY. EBITDA margins contracted 210bp YoY to 22.6%. Domestic FMCG business reported an underlying volume decline of 14.6% (v/s est. +5%).
* Segmental: Skin care, OTC and Ethical, Hair care and Home care reported massive decline of 24.3%, 20.9%, 20.2% and 18%, respectively. While Oral care declined 15.4%, Digestives and Health supplements declined by 9.4% and 9.7%, respectively. International business reported CC decline of 0.5%.
* Balance sheet performance: Cash conversion cycle stood at 11 days. OCF was up 7.6% while PAT was up 1.5%. FCF stood at INR12.1b (4.8% decline YoY).
Highlights from management commentary
* The COVID-19 crisis in 4QFY20 resulted in INR3.6b impact on top line and INR1.1b on the bottom line. Likely impact in 1QFY21 – assuming no further lockdowns – would be INR4.5b on revenue and INR800-900m on PAT.
* India business volumes declined 14% in 4QFY20 (it was up 4.2% in JanFeb’20). Thus, on a calculated basis, decline in Mar’20 volumes was ~50%.
* Management expects the COVID-19 impact on rural growth to be limited due to lower case incidence in the hinterland and favorable factors like robust Rabi cash flows, MNREGA allocation increase and likely good monsoons.
Valuation and view
* Weak results and muted near-term outlook has led to 7.4%/9.0% decline in EPS forecasts for FY21/FY22E. Dabur’s new CEO has introduced many initiatives such as (a) growing the Healthcare segment, (b) the power brand strategy, and (c) new launches. While these hold promise from a longerterm perspective, earnings growth for FY21E is likely to be weak, continuing the tepid trend of the previous 5 years (~7% EPS CAGR). The high wholesale dependence and international business (especially in the MENA region) is also likely to impact top line growth in the near term. Valuations are fair at 43.7x FY22E EPS. Maintain Neutral rating with TP of INR410 (42x FY22E EPS, in line with 5-year average).
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