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Inflation‐led demand slowdown impacts growth momentum; maintain BUY on reasonable valuations and decent growth outlook

Our view

While volume growth has normalized in last two quarters with 2% each given a high base, 2‐ yr revenue CAGR of 16%/12% in Q4FY22/FY22 indicates Dabur’s portfolio strength and share gains. Resilient growth of 7% in healthcare and strong performance from Foods business on a high base were key positives. Its International business continues to grow in double‐digits except Turkey which is soft. Key negatives were category decline in toothpaste and hair oil driving muted growth, yet company was able to gain market share by 20bps/70bps in Q4. Its brands in healthcare, juices and home care continue with a strong growth momentum. Even on the margin front, despite the unprecedented commodity inflation, the company was able to maintain margins with aggressive price hikes in all segments other than hair oil and strong cost controls. Expansion of addressable market is a key focus area for the company in segments like single herbs, beverages and healthcare. We expect the company to continue delivering industry—leading growth for the next couple of years led by aggressive NPD, distribution expansion and brand extensions. Given the nature of portfolio, pricing power remains strong which should help the company keep spending on A&P despite inflation pressure. While margin pressures make us trim our earnings estimates, Dabur’s increased growth aggression, transformation initiatives, strong rural reach expansion strategy amidst an expanding Ayurveda/herbal market and improving International growth outlook, we maintain BUY, as valuations also look reasonable now post the recent correction

Result Highlights

Quarter results – India FMCG volume and value growth of 2% and 7.6%, consolidated revenue growth of 7.7%, international business CC growth of 10.7%, EBITDA and PAT growth of 2.5% and 0.4% given a 130bps gross margin shrinkage.

Portfolio mix – Healthcare increased 7.4% on a high base, still a strong 15% 2‐yr CAGR   with share gains in Chyawanprash and Honey and continued strong growth in OTC/ethicals, HPC grew mere 1.9% due to category decline in oral care and hair oils, shampoo and home care show resilient performance, F&B surged 33.5% led by share gains in juices and continued healthy traction in foods business

Margins – Gross margin dropped 130bps/90bps YoY/QoQ to 47.4% on the back of sustained inflation in vegetable oils and other RM prices. EBITDA margin came in at 18%, A&P spends down 2.5% YoY while it saw sharp fall QoQ to contain margin contraction.

Valuation

We build in revenue/EBITDA/PAT growth of 12%/13%/14% over FY22‐24E. We trim our EPS estimates by ~6% to incorporate margin headwinds and slightly lower revenue growth assumptions due to rural slowdown and category headwinds in hair oil. But given attractive valuations and possibilities of inorganic growth, we maintain BUY on the stock with a revised PT of Rs609 based on 45x FY24E earnings, in‐line with its 5‐yr average multiple.

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