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Published on 31/01/2020 9:04:01 AM | Source: Live Mint

Dabur`s Q3 results commentary adds to worry about valuations of consumer goods stocks

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A pall of gloom surrounds stocks of consumer goods firms. Shares of Godrej Consumer Products Ltd and Colgate Palmolive (India) Ltd fell more than 8% and 6%, respectively, after disappointing quarterly earnings. Dabur India Ltd seemed a bit better off, with its shares falling 2.6% on Thursday. However, the company added to the gloom with its commentary about near-term prospects.

“December has been the worst month in the last 10-15 quarters…. We haven’t really turned the corner. Things are seemingly getting worse. I think there will be pain for another couple of quarters before we see the revival," Mohit Malhotra, chief executive of Dabur India, said in an interview with CNBC-TV18.

In a press statement, he said, “The near-term outlook for demand growth remains challenging with most key categories reporting a steady decline in value and volume growth."

This perhaps explains the decline in the Dabur India stock despite the 5.6% volume growth in the domestic business for the December quarter. Note that the stock touched a 52-week high of ₹505.85 on 27 January.

Investors are suddenly waking up to the fact that the commentary by consumer goods firms doesn’t quite sit with the fancy valuations of these stocks. The Dabur India stock, for instance, trades at 44 times estimated earnings for FY21, according to Bloomberg data.

Coming back to the December quarter results, volume growth is nothing to complain about when consumer confidence is low in the country. In fact, the company’s domestic volume growth for the September quarter was a bit lower at 4.8%. Domestic FMCG (fast-moving consumer goods) segment contributed 71% of Dabur India’s overall business. Net sales increased by 5%. “We see this as a satisfactory performance considering the slowdown in the rural market and slowdown in general," wrote analysts at Dolat Capital Market Pvt. Ltd.

The company’s international business expanded by almost 12% in constant currency terms led by strong growth in key markets such as the Middle East and North Africa; Egypt; Nigeria; Turkey and Nepal.

Overall, consolidated revenue at ₹2,353 crore increased by 7% over the same period last year. Revenues were marginally better than Street estimates.

Ebitda (earnings before interest, tax, depreciation and amortization) margins rose 70 basis points to 20.9%, partially helped by gross margin expansion.

“True, Dabur’s volume numbers missed my estimate of 7%. However, if in testing times they are managing well, once the recovery comes they may be able to do better than peers. One positive thing is that the company has gained share from market leaders in certain categories such as oral care and hair care," said Nitin Gupta, analyst at SBICAP Securities Ltd. However, Dabur India’s valuations more than adequately captures this optimism.