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Strong volume traction with share gains across segments; stable outlook on growth and margins; upgrade to BUY

Our view

Dabur continues to deliver one of the best underlying growth performance in the staples space with a 12% 2-yr revenue CAGR with market share gains in each segment. The company also continues to grow much faster in rural markets than urban markets, again in stark contrast to peers and the industry given its rural distribution initiatives. Its brands in healthcare, oral care, juices and home care continue with a strong growth momentum. Even on the margin front, despite the unprecedented commodity inflation and faster growth in low-margin juices segment, 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. Given Dabur’s increased growth aggression, transformation initiatives, strong rural reach expansion strategy amidst an expanding Ayurveda/herbal market and improving International growth outlook, we upgrade the stock from Add to BUY, as valuations also look reasonable now post the recent correction.

Result Highlights

* Quarter results – India FMCG volume and value growth of 2% and 7.4%, consol revenue growth of 7.8%, international business CC growth of 8.7%, EBITDA and PAT growth of 9.3% and 2.3% given a 30bps margin improvement despite gross margin contraction.

* Portfolio mix – Healthcare declined 3% on a high base, still a strong 11% 2-yr CAGR with share gains in Chyawanprash and Honey and continued strong growth in OTC/ethicals, HPC grew 8.4% led by share gains in oral care, hair oils and shampoo, F&B surged 37.6% led by share gains in juices and continued healthy traction in foods business.

* Margins – Gross margin dropped 190bps/50bps YoY/QoQ to 48.3% on the back of sustained inflation in vegetable oils and other RM prices. EBITDA margin came in at 21.3% vs 21% in Q3FY21 led by controlled employee and other expenses.

Valuation

We build in revenue/EBITDA/PAT growth of 14%/16%/14% over FY21-24E. We raise our estimates marginally to incorporate solid margin outperformance, and slightly increase our revenue growth assumptions led by consistent market share gains across the portfolio. We upgrade our rating from Add to BUY on the stock with a revised PT of Rs650 based on 45x FY24E earnings, in-line with its 5-yr average multiple.

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