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Strong volume traction with share gains across segments; stable outlook on growth and margins; Upgrade to ADD

Our view

Dabur posted one of the best performances among peers in the staples space with doubledigit volume growth driven by market share gains across segments in addition to stable margins despite the commodity inflation. The company has dispelled concerns on rural growth (grew 100bps higher than urban growth) where it expects to see continued momentum because of its distribution and innovation efforts. Robust revenue growth in HPC and Foods and strong momentum in Healthcare helped mitigate RM inflation to a large extent. Foods portfolio margins improved significantly aided by scale benefits and reached a new high of 18%. We believe despite the high base for remainder of the year, momentum in rural growth and strong execution are likely to result in double-digit volume growth in FY22 and beyond. Given Dabur’s increased growth aggression, transformation initiatives, strong rural reach expansion strategy amidst an expanding Ayurveda/herbal market and improving International growth outlook, we upgrade the stock from REDUCE to ADD, albeit rich valuations limit the absolute upside potential.

Result Highlights

* Quarter results – India FMCG volume and value growth of 10% and 11.9%, consol revenue growth of 12%, international business CC growth of 13.8%, EBITDA and PAT growth of 9% and 4.7% given a marginal 60bps margin decline amidst RM inflationary pressure and higher tax rate in India; 95% portfolio saw share gains

* Portfolio mix – Healthcare declined 5% on a high base, still a strong 20% 2-yr CAGR with share gains in Chyawanprash and Honey and continued strong growth in OTC/ethicals, HPC grew 17% led by share gains in oral care, hair oils and shampoo, F&B surged 43% led by share gains in juices and continued healthy traction in foods business.

* Margins – GM at 48.8% vs 50.9% YoY, EBITDA margin came in at 22%, marginal 60bps decline YoY owing to lower gross margin and higher other expenses. A&P spends were stable during the quarter; expect to sustain margins with inflation broadly passed on.

* Cash usage – Increased interim dividend to Rs2.5/share; evaluating strategic acquisition opportunities to utilize Rs 5600cr cash on books.

* Outlook – Target high single-digit volume and double-digit revenue growth in FY22 with marginally lower gross margins but stable EBITDA margins led by cost savings; aggressive innovation, distribution, digitization efforts to continue.

Valuation

We build in revenue/EBITDA/PAT growth of 13%/15%/12% over FY21-24E. We trim our estimates marginally to incorporate near-term margin headwinds, but slightly increase our revenue growth assumptions led by consistent market share gains across the portfolio. We upgrade our rating from Reduce to ADD rating on the stock with a revised PT of Rs631 based on 45x FY24E earnings, in-line with its 5-yr average multiple.

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