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Big miss; estimates cut by 9%/7% for FY22/23E

A brief view on its 4QFY21 result and stock

* While Dabur reported consolidated sales growth of 25.3% YoY in 4QFY21, it was on a low base. Thus, the average sales growth momentum in the last two-years dipped to a more modest 6.5% in 4QFY21 from 8.9%/11.5% in 2Q/3Q. There will also be some impact from the slower-than-expected recovery in the Beverages business (15% of sales in FY21) due to the lockdowns impacting sales in the key summer season. Along with higher than anticipated tax rates, these factors have led to a 9.4%/6.9% cut in our FY22E/FY23E EPS.

* We maintain that the management’s initiatives in the last two years in the form of: a) a spate of new launches, b) sharp increase in advertisements, c) continued expansion in distribution, d) investment in technology and analytics, and e) cost saving efforts plowed back into the business for growth would set Dabur on the right path towards a much stronger topline and earnings growth, commensurate with the inherent potential in its Healthcare, F&B, and HPC business.

* Dabur has delivered double-digit topline growth in two of the past three years unlike most peers. New products now contribute 5% of sales. Earnings growth, after the ongoing investment in these initiatives, will be even stronger than topline growth. Maintain BUY.

Growth strong, though lower than our expectations

* Consolidated sales grew 25.3% YoY to INR23.4b (est. INR24.6b) in 4QFY21. EBITDA was up 25.6% YoY to INR4.4b (est. INR5.1b). PBT grew 25.4% YoY to INR4.5b (est. INR5.2b). Adjusted PAT rose 27.1% to INR3.8b (est. INR4.1b).

* India FMCG volumes grew 25.4% YoY in 4QFY21.

* Gross margin contracted 40bp YoY to 48.7% (est. 49.8%). As a percentage of sales, lower staff cost (down 80bp YoY to 11.5%), higher ad spends (up 120bp to 6.6%), and lesser other expenses (down 80bp to 11.7%) resulted in a flat EBITDA margin at 18.9% (est. 20.8%).

* Ad spends rose 53.8% YoY to INR1.5b in 4QFY21.

* Sales/EBITDA/PAT grew 5.7%/8.3%/7.1% YoY in FY21.

* Standalone sales/EBITDA/adjusted PAT grew 9.9%/11.7%/11% YoY. EBITDA margin expanded 40bp YoY to 20.9%. The domestic FMCG business grew 28.3% YoY.

* The international business registered constant-currency growth of 21% YoY.

* Receivable days saw a considerable improvement of 9 days taking them to an average of 26 days in FY21. Thus, average net working capital days also improved to 20 days from 29 days on a YoY basis.

* CFO/FCF also grew 31.1%/49.1% in FY21, well ahead of EBITDA/PAT growth.

* The company has recommended a final dividend of INR3/share.

Highlights from the management commentary

* Localized restrictions are leading to some last-mile disruptions, but the management is much better prepared than last year to ensure lower supply chain disruptions. Factories continue to operate at a near normal basis.

* The Healthcare portfolio is witnessing an uptick since the second half of Apr’21 and should make up for any loss in the discretionary business in 1QFY22.

* Secondary sales growth in 4QFY21 was broadly in line with that in preceding quarters.

* The outlook for the international business (25% of sales) is strong, and the management expects an improvement in operating margin as well.

* There has been 5-6% inflation in the commodity basket, and despite a 3% price increase in 4QFY21 and another price increase in 1QFY22, gross margin will be under pressure in the current quarter.

* The management reiterated that they don’t expect any YoY dip in EBITDA margin in FY22 over FY21 levels.

Valuation and view

* Changes to the model have resulted in a 9.4%/6.9% cut to our FY22E/FY23E EPS estimate as a result: of a) some slowdown in the impressive sales momentum in the preceding quarter, b) some near term gross margin pressure, c) delayed recovery in the Beverage business, and d) higher than expected guidance on tax rates in FY22 and FY23.

* As indicated in our upgrade note in Jul’20, despite the blip in 4QFY21 (two-year average sales growth was still 6.5%), the structural and medium-term narrative on topline growth is highly attractive – led by strong traction in the profitable Healthcare business and an attractive rural growth outlook (~48% of domestic sales from rural). The investment case is being strengthened further, supported by: a) a focus on the core business, b) power brand strategy, c) a spate of new launches, d) an increasing direct distribution reach, e) narrowing gap on analytics v/s domestic peers, and f) cost savings, which are being plowed back into the business in the form of higher advertisements.

* Given the long term earnings growth potential of the business, valuations at 43.2x FY23E do not appear expensive. We maintain our Buy rating, with a TP of INR620 per share (50x FY23 EPS).

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