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* Revenue was in line with our estimates in 4QFY23. Volumes grew ~1% v/s our expectation of 5%. Rural markets remained lackluster; however, the management witnessed some green shoots at the end of the quarter.

* EBITDA margin contracted 270bp YoY to 15.3%, the lowest in the last 35 quarters. It was affected by an adverse product mix, a step-up in media spends and one-off expenses to the tune of INR250-300m. It seems margin has hit the trough; however, a recovery to 20% EBITDA margin would be gradual as most of the gains from the gross margin expansion would be invested back in media spends.

* Despite near-term challenges, Dabur (with nearly half of its domestic sales coming from rural) remains a good play on the incipient but gradual rural demand recovery theme. We retain our target P/E multiple of 45x FY25E EPS to arrive at a TP of INR595. Maintain BUY.

Performance in line with pre-quarterly update

* Dabur’s 4QFY23 consolidated sales grew 6.4% to INR26.8b (est. INR27.8b).

* EBITDA/PBT/adj. PAT declined 9.6%/16.7%/22.8% YoY to INR4.1b/INR4b/ INR2.9b (est. INR5.5b/INR5.5b/INR4.2b). ? We believe the company likely posted 1% India FMCG volume growth YoY in 4QFY23 (est. 5%).

* Gross margin contracted 160bp YoY to 45.8% (est. 46%).

* As a percentage of sales, stable ad-spends (-30bp YoY to 5.7%), stable staff costs (-30bp YoY to 10.8%) and high other expenses (+170bp YoY to 14.1%) led to EBITDA margin contraction of 270bp to 15.3% (est. 20.2%).

* FY23 sales grew by 5.9% to INR115.3b, while EBITDA/adj. PAT declined 4%/6.7% to INR21.6b/INR17b.

* 4QFY23 standalone sales grew 4.7% YoY to INR19.4b. EBITDA/adj. PAT declined 7.8%/7.4% YoY to INR3.0b/INR2.7b. EBITDA margin came in at 15.7% v/s 17.8% YoY. FY23 sales grew by 6.2% to INR86.8b, while EBITDA/ adj. PAT were flat at INR17b/INR14.1b.

Highlights from the management commentary

* Rural markets continue to lag behind urban markets, due to inflation and downtrading. However, some green shoots were visible at the end of the quarter.

* Direct reach now stands at 1.4m and 7.7m outlets in total, including indirect reach, and village coverage has increased to 100,000.

* Media investments are currently 5-5.5% and will go up to 7-8% gradually.

* Odonil has a 33% market share, which is the same/slightly higher compared to the nearest competitor.

* The healthcare portfolio should improve as the high base fades ahead.

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