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Sales visibility and pricing power augur well

DABUR’s 4QFY22 result was broadly in line with our volume, sales, and gross profit estimates, but higher other expenses led to a miss on EBITDA.

The outlook for Juices is positive, given the robust summer demand. The demand and margin outlook for the international business is strong in FY23. Allied with higher pricing power in the Healthcare business, we remain positive on double-digit consolidated sales growth in FY23.

Higher pricing power across its portfolio is only being strengthened by continued market share gains in 99% of its portfolio, which means that material costs may be less of a concern in FY23 v/s its peers.

We maintain our Buy rating on healthy earnings growth prospects and inexpensive valuations.

Sale/gross profit in line; higher other expenses led to an EBITDA miss

DABUR’s 4QFY22 consolidated sales grew 7.7% YoY to INR25.2b (in line). EBITDA/PBT/adjusted PAT grew 2.5%/5.2%/0.4% YoY to INR4.5b/INR4.8b/INR3.8b (est. INR5.4b/INR5.5b/INR4.2b).

Domestic FMCG volumes grew 2%/10.1% YoY in 4Q/FY22.

Gross margin contracted by 130bp YoY to 47.4% (est. 48%). As a percentage of sales, lower staff cost (-40bp YoY to 11.1%), ad spends (-60bp YoY to 6%), and higher other expenses (+60bp to YoY to 12.4%) resulted in a 90bp contraction in EBITDA margin to 18% (est. 20.9%).

Sales/EBITDA/adjusted PAT grew 10.1%/21.3%/12.2% YoY in FY22.

Standalone sales grew 7.6% YoY in 4QFY22. EBITDA/adjusted PAT declined by 1%/2.8% YoY to INR3.3b/INR2.9b. EBITDA margin contracted by 150bp YoY to 17.8%.

The international business registered a constant-currency growth of 10.7%/15.8% YoY in 4Q/FY22.

The company has recommended a final dividend of INR2.7/share

Highlights from the management commentary

A strong summer season, good harvest, and predictions of a normal monsoon are expected to result in a good demand in FY23.

The base in the Healthcare segment is not favorable in 1QFY23, but it does not pose a challenge in subsequent quarters.

The outlook for Juices and Nectar summer season sales is very good. It has already done well in Apr’22.

The management aims to maintain FY23 operating margin at current levels.

Higher other expenses in 4QFY22 were on account of a shortage in capacity in the Fruits business, which led to higher processing charges. Higher freight and Food business sales also led to the increase.

In the next four years, the management will like e-commerce to account for 19-20% of sales from 6.5% of sales in FY22.

Valuation and view

There is a 4% reduction in our FY23 EPS forecast. However, we maintain our FY24 EPS estimate.

The medium-term and structural narratives on revenue growth are highly attractive, led by the initiatives taken by the new CEO in recent years on power brands, distribution, launches, and better analytics. Consequently, FY23 is likely to be the fourth year out of five of double-digit sales growth. As the impact of investing in these initiatives abates, DABUR’s margin is likely to expand in FY24. We highlighted the investment case in detail in our recent detailed note.

In the near term, DABUR’s sales visibility is better than its peers. Coupled with higher pricing power v/s its peers, DABUR’s earnings have better visibility. We maintain our Buy rating with a TP of INR630/share (45x FY24E EPS)

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