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In line, margin to improve with a lag

? DABUR reported an in line 1QFY23 earnings. Despite indicating continued margin pressures in 2Q, the management aims to maintain FY23 margin at FY22 levels.

? Despite rural contributing half of its domestic sales, DABUR reported near identical growth in both rural and urban as a result of its efforts to boost rural distribution. This is unlike the broader Consumer category, where rural demand remains tepid. The company can benefit from the tailwind of a potential recovery in rural demand.

? The base of the Healthcare business becomes less challenging in subsequent quarters. Traction in most of the other businesses, barring Hair Care, is healthy, with 98% of its portfolio also gaining market share, by far the best among its peers. We maintain our Buy rating.

Performance in line with our estimates

? Consolidated sales grew 8.1% YoY to INR28.2b in 1QFY23 (in line).

? EBITDA/PBT/adjusted PAT remained flat YoY at INR5.4b/INR5.6b/INR4.4b (est. INR5.4b/INR5.7b/INR4.4b).

? The company’s India FMCG business is likely to have clocked a volume growth of 5% in 1QFY23 (in line).

? Gross margin contracted by 220bp YoY to 45.9% (est. 47.7%). As a percentage of sales, lower staff cost (down 30bp YoY to 9.6%), ad spends (down 160bp to 5.6%), and higher other expenses (up 160bp to 11.5%) restricted the contraction in EBITDA margin to 190bp at 19.2% (in line).

? In 1QFY23, standalone sales grew 9.9% YoY to INR21.8b. EBITDA/adjusted PAT remained flat YoY at INR4.3b/INR3.5b. EBITDA margin contracted by 250bp YoY to 19.6%

Highlights from the management commentary

? The Food category achieved sales of INR1b in FY22. It is likely to achieve sales of INR2b in FY23 and INR5b over the next three-to-four years.

? Sales of Drinks crossed INR1b in FY22, and is likely to end FY23 with INR2b in sales. Sales from this segment already constitute a significant share of the Beverage business sales of INR12b.

? NPDs constitute ~5% of its total turnover.

? DABUR raised prices by 5% and reduced grammage by 1.5% in response to the ~9% inflation in raw material cost. While margin in 2Q is likely to remain subdued, 3Q and 4QFY23 will see an improvement in gross margin, led by lapping high inflation in FY22 and further price increases

Valuation and view

? Changes to our model have resulted in a 4.6% reduction in our FY23 EPS, but the cut in our FY24 EPS is marginal at 1.6%.

? The 5% volume growth in 1QFY23 was superior to most peers, despite a higher base. Average volume growth in the last three-years stands ~10%. Despite unusual sales in the Healthcare business during the COVID-related lockdown period coming off, the overall sales growth trajectory is in the double-digit CAGR range, a continuation of the turnaround seen by DABUR under the new CEO.

? A combination of mix improvement (the juice business, which boosted sales in 1QFY23, is a low margin business), material cost stability, further price increases, and a less challenging base is likely to result in healthy earnings growth from 2HFY23 onwards. We maintain our Buy rating and target a PE multiple of 45x, even as we roll forward to Jun’24 EPS to arrive at our TP of INR660.

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