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When (great) execution meets (some) tailwinds

We are longstanding believers in Mohit Malhotra-led reimagining of Dabur. We had observed the willingness to take risks (read new launches) in the last two years. All said, 1Q surprised us positively on the magnitude of execution. It reported a strong print with 2-year revenue CAGR of 8% and domestic volume growth (2-year CAGR) of 10%. Importantly, it achieved outperformance across the portfolio.

The report card states that it does not matter whether Dabur is a leader or a challenger in a category, its gaining share in most of them. To add to it, the continued momentum in healthcare and expanded opportunity in foods (beverages) are aiding a strong print. However, we believe (1) slowdown risk in the healthcare portfolio still exists and (2) sustaining growth momentum in the beverages portfolio may be difficult.

We like the (1) continued thrust on innovation, agility and culture change driven by Mohit, (2) utilising e-commerce platform to drive new product development (premiumisation), (3) distribution expansion and increased investment behind power brands to drive growth. Further, turnaround in International business and Foods business (now with presence in larger drinks category) with recovery in HPC portfolio can be a key growth driver. Add, TP Rs700.

* Good growth momentum: Consolidated sales / EBITDA / PAT grew 32% / 33% / 28% on the back of a broad-based growth (foods grew ahead); on 2-year CAGR basis revenue was up 7.7%. Domestic FMCG sales grew 35.4% with 34.4% volume growth (2-year CAGR of 10.2%). This performance was driven by (1) strong performance (and recovery in parts of portfolio) in HPC (+26%) – market share gains in oral care (+21%), hair care (+39%) and Home Care (+30%), (2) strong acceleration in foods portfolio (+80.4%) on the back of new launches and distribution expansion, and (3) strong performance in healthcare segment (+30%) – with OTC, supplements and ethical portfolio growing 52%, 24.5% and 51%, respectively.

* Margins benefit from operating leverage: Consolidated gross margin declined 130bps to 48.1% due to (1) inflationary headwinds in most input cost which was partially offset by pricing (~3%) and (2) inferior product mix (higher contribution from beverages). EBITDA margin was slightly higher at 21.1% (+10bps YoY) on the back of operating leverage benefit (absolute spends were 15-34% higher on a YoY basis) – ad-spends (-15bps) and staff costs (-142bps) were lower on a % sales basis. While Dabur is facing 9-10% inflation in its RM basket, it has taken just 3% price hikes. The inflationary impact is being offset by (1) rationalising trade margins and consumer promotions and (2) driving efficiencies and cost savings. Further prices hikes may be taken if inflation pressure continues in Q3 as well.

* Broad based performance in International business: Revenue grew 28.2% (34.2% constant currency growth), driven by good performance across most geographies – MENA (+50%), Egypt (+44%), SAARC (42%) and USA (Namaste; +40%). However, there are fresh Covid restrictions in select geographies.

* Valuation and risks: We increase our earnings estimates by 2-3%; modelling revenue / EBITDA / PAT CAGR of 13 / 16 / 15 (%) over FY21-23E. Maintain ADD rating with DCF-based revised target price of Rs700. Key downside risk is sustained weakness in consumption demand.

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