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Emkay Global Financial Services Ltd

* Dabur reported a healthy Q2 performance with 12% sales growth (2% ahead of estimates). The domestic FMCG business grew by 12% (2-yr CAGR of 15%), with 10% volume growth on strong growth in the Foods segment. EBITDA/PAT grew 9%/5% (1%/2% miss).

* Management’s aggression on innovations remains high. It expects to clock double-digit domestic sales growth, driven by strong execution and hope of rural pick-up in the festive season. F&B outlook is strong, which is expected to offset the moderation in Healthcare.

* Input inflation is expected to stay elevated in the near term, impacting gross margins. However, the commentary indicated a stable operating margin outlook, led by further price hikes in H2, cost savings from Project Samriddhi and optimization of ATL spends.

* Although a higher ETR moderates FY22 earnings, volume performance and growth initiatives offer a positive outlook. As the stock looks fairly valued at 50x FY23E EPS, we await a better entry point. Retain Hold with a revised Dec’22 TP of Rs600 (45x Dec-23E EPS).

* Strong domestic performance led by F&B: Domestic sales/volume grew at 12%/10%. Healthcare declined 5% on a high base and reduced traction for immunity-boosting products. With increased category penetration of Chywanprash, Dabur hopes to scale it with launches in tablet/powder form. Home and Personal Care grew by 17%, driven by 28% growth in hair oils and market share gains in hair oils/ayurvedic shampoos and odomos. Oral Care grew 13%, with a 40bps share gain. F&B grew 43% (faster than the industry at 37%) on a 100bps share gain and strong consumer response from launches in the drinks segment in PET bottles. Led by strong contribution from F&B launches (10% of segment sales), beverage sales are expected to be Rs1bn in FY22. Rural grew ahead of Urban by 100bps as management continued to expand its footprint – village coverage up to 83k, with plans to reach 90k villages in FY23. International business grew 14% in cc terms, and is expected to see double-digit growth for the year, similar to domestic outlook.

* Pricing actions and cost savings to protect margins: Gross margin was down by 200bps to 49% (250bps decline in domestic alone). The operating margin decline was lower at 60bps, supported by lower ad and employee spends. Inflationary trends are likely to continue; however, the company has been able to pass on most of the inflation across portfolio, excluding hair oils. Further pricing actions in H2, optimization in ATL spends and cost savings through Project Samriddhi should contain operating margin impact ahead.

* Await a better entry point; retain Hold: Though higher ETR could moderate FY22 earnings, better volume performance and aggressive portfolio expansion through NPDs offer a positive outlook. As the stock looks fairly valued at 50x FY23E EPS, we await a better entry point. Retain Hold but cut TP from Rs625 to Rs600, based on 45x Dec-23E EPS.

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