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In-line performance, though rural faring well

Dabur’s Q1FY23 print was in-line with our estimates. Despite high base, consolidated revenue/APAT grew 8.1%/1.1%, while 2-year CAGR was 19.4%/13.7%. India FMCG business surged 10%, led by 5% volume growth. International business (23.5% of sales) grew 8.8% (CC). Bearing in mind high base (+35.4%), unsettled execution coupled with efforts on NPD, led Dabur to continue deliver reasonable performance. driven by rural distribution efforts and its power brand strategy. Gross margin cut by 224bp to 45.9% owing to ~9% cost inflation. Other exp./employee cost grew 25.6%/4.5%, and cut in ad-spend by 16.5% resulted in muted EBITDA, declined 1.5%; EBITDA margin at 19.3% (-188bp). We remain hopeful on growth prospects, driven by distribution excellence, covering 100k villages and touching 1.4mn outlets directly. Management expects double-digit growth to continue. We retain our earnings and maintain BUY with a DCF-based TP of Rs650 (47.4x FY24E EPS).

Q1 growth driven by HPC and Foods and beverages, though healthcare declined double digit

Dabur’s Q1FY23 revenues grew 8.1%, despite high base (+35.4%) driven by domestic revenue at +10% backed by 5% volume growth. Management cited that penetration-led strategy (RISE) coupled with NPD contribution at 4.5% delivered growth. Direct reach improved to 1.3mn, covering 90k villages. Despite high base and waning effect Covid-contextual products, Healthcare (25.7%) declined 21%, HPC (47.6% of sales) grew 16%, foods (26.7%) grew 50%; Category growth: home care (+51.9%), beverages (+50.7%), foods (+35.7%), digestives (+30.5%), shampoo (+17%), oral care (+12.5%), skin/salon (+11.4%), hair oils (+8.1%), while OTC/ethicals and health care declined 15.4%/35.5% respectively. The international business grew 8% (CC) led by Turkey (+88.3%), SSA (+35.4%), Egypt (+17.5%), SAARC (+17.3%), while MENA/Namaste declined 3%/10.3%.

Sharp inflation at 9% hit Q1 gross margin; management remains confident on margins

Management executed ~5% price increases to negate ~9% inflation in RM/PM. Yet, gross margin slipped 224bp to 45.9%. Other expenses/ employee cost grew 25.6%/4.5%, yet adspends declined 16.5%, resulting in EBITDA decline of 1.5%; EBITDA margin moderated to 19.3% (-188bp). Notwithstanding near-term headwinds, management remains confident of taking more price hikes to maintain gross margins, coupled with benefits arising from project Samriddhi. Dabur intends to reinvest extra margins in advertising and promotions to drive volumes. Adjusted PAT grew slower at Rs4.4bn (+1.1%) due to higher interest expenses.

FY23 revenue to be driven by power brand strategy and NPD contribution of +5%

Management said FY23 performance to be driven by: (1) faster growth in rural than urban markets, though Nielsen data point our slower growth, (2) e-commerce now contributes 7% and NPD ~4.5% of revenue, (3) penetration led growth for Ayurveda/ natural/herbal products, (4) expanding juices/nectar/still drinks product basket, huge upside in rural markets, (5) building direct coverage to 1.4mn and 100k villages, and (6) continued savings from project Samriddhi.

Valuation and risks

We reckon exceptional efforts, with focus on building capabilities and driving rural penetration for its 8 power brands could lead to sustained volume growth momentum. We remain positive on growth prospects. We retain our earnings and maintain BUY, with a DCF-based TP of Rs650 (47.4x FY24E EPS). Risks to our call include tepid demand conditions, prolonged recovery from ongoing Covid wave, and irrational competition.

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