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Resilient results given high rural dependence

DABUR’s 3QFY22 results were in line with our estimates. The double-digit two-year CAGR on volumes, sales, EBITDA, and PAT is particularly creditable given its a) higher rural exposure v/s peers and b) some ongoing moderation from the extremely high sales levels in Healthcare as the intensity of the pandemic abates.

Market share gains across the portfolio are heartening, as is the progress in e-commerce sales and modern trade (MT), areas where DABUR was lagging behind earlier.

After the new CEO took over, DABUR is expected to see double-digit sales growth for the third out of the four years of his tenure in FY22. We believe this growth is sustainable and would lead to earnings growth in the mid-tohigh teens – as investments made in recent years begin to bear fruit. DABUR remains among our preferred picks in Staples. We maintain our BUY rating.

Results in line with our estimates

.DABUR’s 3QFY22 consolidated sales grew 7.8% YoY to INR29.4b (in line with our estimate). EBITDA / PBT / Adjusted PAT grew 9.3%/10%/2.3% YoY to INR6.3b/INR6.2b/INR5b (in-line).

Domestic FMCG volumes grew 2% YoY in 3QFY22 (est. 4.5%)

The gross margin contracted 200bp YoY to 48.3% (in-line). As a percentage of sales, lower staff costs (-80bp YoY to 9.3%), lower ad spends (-230bp to 8.1%), and higher other expenses (+70bp to 9.7%) resulted in a 30bp expansion in the EBITDA margin to 21.3% (est. 21%).

Sales / EBITDA / Adjusted PAT grew 15.9%/15.4%/9.8% YoY in 9MFY22

Standalone sales/ EBITDA grew 7.4%/7.5% YoY in 3QFY22. Adjusted PAT declined 1.5% YoY to INR3.9b. The EBITDA margin remained flat YoY at 21.9%

The Healthcare segment declined 8.3% YoY (Ayurvedic Ethicals and OTC: +3.6%, Digestives: +12.2%, and Health Supplements: -8.3%). Home and Personal Care rose 8.4% YoY (Oral Care: +6.7%, Skin Care and Salon: +3.2%, Shampoos: +21.2%, Hair Oils: +6.1%, and Home Care: +18.6%). F&B grew 37.6% YoY (Beverages: +38.6% and Foods: +26.4%)

The international business registered constant-currency growth of 8.7% YoY.

Highlights from management commentary

Unlike peers, rural sales growth for DABUR was healthy at 7.5% in 3QFY22 (on a 25% base in 3QFY21) and exceeded urban growth of 2.6% for the quarter (on a base of 18%).

DABUR gained market share of 520bp in Juices, chipping away at the shares of Tropicana and B-Natural. Additionally, it is gaining share in Drinks as well. While the total addressable market (TAM) for Juices and Nectars is INR15b the company’s broader play in Drinks (introduced in recent years) raises its TAM to INR100b; DABUR is likely to reach INR1b in sales in FY22. The management targets the doubling of Drinks sales from these levels going ahead.

RM inflation is expected to be high in 4QFY22 as well. The price hikes in 3QFY22 may be followed by another round of hikes. The gross margin would improve sequentially. Dominance in several categories has allowed the company to take price hikes and resulted in a margin impact lower than that seen in peers.

Over the next 4–5 years, the business margins of Foods (and Beverages) would be boosted by 200–300bp over current levels as a result of INR1.7b in PLI benefits awarded by the government on the new capacity being developed in Indore.

Valuation and view

There is no material change to our FY22E/FY23E/FY24 EPS estimates as results were in-line and there is no change in the outlook

The near-term, medium-term, and structural narratives on topline growth are highly attractive, led by strong traction across the domestic and international businesses, despite a high base. Rural performance and the outlook are better v/s peers, while material cost pressures are lower.

The investment case is being further strengthened, supported by a) focus on the core Healthcare business, b) DABUR’s power brand strategy, c) a spate of new launches, d) an increasing direct distribution reach, e) a narrowing gap v/s domestic peers in the use of analytics, and f) cost savings, which are being plowed back into the business in the form of higher advertisements.

While valuations at 45x/39.4x FY23E/FY24E EPS are not cheap, the potential for earnings growth is much stronger going forward as the management initiatives underlined above begin to yield benefits, leading to sustained premium multiples. We maintain our Buy rating with TP of INR705/share (50x FY24E EPS).

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