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Dabur India Ltd. (DABUR) 4QFY23 operating performance was significantly lower than our estimate as indicated by the company in their pre-quarterly update. The miss was largely on account of increased A&P spends & unfavorable mix in domestic business, along with currency headwinds in International Business. Going ahead, Dabur is seeing some revival in rural demand. Inflation is also moderating, which means gross margin profile will keep on improving but company will prioritize normalizing its A&P spends before seeing benefits at operating level. We thus build delayed margin expansion and reduce our FY24E/FY25E EPS estimates by 9%/6.1%. We continue to maintain our ADD rating with  a revised target price (TP) of Rs590.

Result Highlights (Consolidated)

* 4QFY23 headline performance: Revenues grew by 6.4% YoY to Rs26.8bn. EBITDA was down 9.6% YoY to Rs4.1bn. Adjusted PAT (APAT) was down 16.5% YoY to Rs3bn.
* Home care business grew 10.3%. OTC & Ethicals business was down 0.4%. Health Supplements was down 3.3%. Digestives reported a 5.6% growth. Oral care was down 3%. Hair oil was flat. Beverages grew by 29%. Foods (ex-Badshah) grew by 22%.
* Gross margin was down 160bps YoY to 45.8% (but up 30bps QoQ). Higher other overheads (up ~170bps YoY) partly offset by savings in A&P spends (-30bps YoY) and staff cost (-30bps YoY) meant that EBITDA margin was down by 270bps YoY to 15.3%.
* FY23 performance: Revenue grew by 5.9% while EBITDA & APAT were down by 4% & 5.4%, resp. Gross/EBITDA margin were down 260bps/190bps YoY to 45.6%/18.8%.

Key Concall Highlights
(1) Slight amount of moderation of Foods growth cannot be ruled out going forward due to base effect. Foods growth will still remain in double-digits but not high double-digits. Dabur is targeting Rs5bn Foods business next year and Rs10bn over the next 5-6 years. Food & Beverages (F&B) business together stands at Rs17bn today which can go up to Rs40-50bn in 5-6yrs.
(2) With inflation coming down, first priority for the company will be to spend on A&P and then expand operating margins.

View & Valuation

We are currently building ~10% revenue CAGR over FY23-FY25E. Key drivers: (a) Focus on gaining market share in key categories - DABUR’s Power Brand strategy of focusing on nine of its major brands – that account for a majority (>70%) of the company’s consolidated revenue will continue to pay dividend in the medium to long term. (b) Play on rural growth as distribution continues to expand – direct coverage increased to ~1.4mn outlets from 1.28mn, taking the total reach to >7mn outlets. Also, village coverage saw a significant jump to 100k villages across the country from 59,217 villages in FY21. Ahead-of-the-curve investments and expected improvement in rural demand will augur well for Dabur. (c) Expanding TAM through power platform strategy and innovations gives decent visibility for medium-term growth. At operating level, we expect ~15.7% EBITDA CAGR over FY23- FY25E (~200bps EBITDA margin expansion as we expect gross margin profile to revert to normal levels by FY25). As gross margin improves, company will prioritize normalizing its A&P spends before seeing benefits at operating level. We thus build delayed marginexpansion and reduce our FY24E/FY25E EPS estimates by 9%/6.1%. Dabur is currently trading at 47x/41x on FY24E/FY25E EPS, discount to its historical average, as we build in n~16.2% EPS CAGR. We continue to have an ADD rating on the stock with a revised target price of Rs590 (Rs625 earlier), valuing it at ~52x March’2024E EPS (implied March’25E PE multiple of ~45x; 3yr/5yr avg fwd. multiple: 54x/52x).

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