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Stellar performance; delivering on promise

Brief view on results and stock

* Following up on volume growth of 17% in 2QFY21 (third-highest in 50 quarters for the company), DABUR did even better with 18% volume growth in 3QFY21 – despite a more challenging base. This indicates the efforts undertaken under the guidance of the new CEO over the past year and a half have revitalized volume and topline growth momentum. Not only was volume growth far superior against historical levels, but the company also saw a second consecutive quarter of ‘best among staples peers’ volumes.

* Importantly, growth is also turning broad-based, with 16% growth in HPC, 13% growth in the international business (with the MENA region also doing well now), and return to growth in the Foods business. This means the company’s significant dependence on the Healthcare business to drive topline growth is reducing.

* Led by a host of initiatives highlighted under our CEO meet note and AR note, we believe the topline growth momentum may be sustainable in subsequent years. This would lead to continued improvement in the growth trajectory (12.6% CAGR over FY20–23E v/s a paltry 2.1% over FY15–20), with the earnings CAGR likely to be 15.5% over FY20–23E (more than double the CAGR in the preceding five years). Given the longer term potential of the business, valuations at 45.4x FY22E and 38.8x FY23E do not appear challenging. Maintain BUY.

Beat on all fronts

* Dabur’s 3QFY21 consolidated reported sales grew 16% YoY to INR27.3b (est. INR25.6b). EBITDA was up 16.5% YoY to INR5.7b (est. INR5.5b). PBT grew 17.6% YoY to INR5.9b (est. INR5.5b). Adj. PAT improved 18.9% YoY to INR4.9b (est. INR4.5b).

* The company reported India FMCG volume growth of 18.1% YoY in 3QFY21.

* Gross margins expanded 30bp YoY to 50.4% (in line with our estimates). This – along with a) lower staff cost as a percentage of sales (down 40bp YoY to 10%), b) higher ad spends (up 170bp YoY to 10.3%), and c) lower other expenses (down 110bp to YoY to 9%) – resulted in EBITDA margins expanding 10bp YoY to 21% (in line with our estimates).

* In absolute terms, ad spends grew 38.8% YoY in 3QFY21, following 40.2% YoY growth in 2QFY21. This indicates the management’s willingness to invest in the visibility of its brands and, therefore, growth.

* 9MFY21 sales/EBITDA/PAT grew 5.7%/8.3%/7.1% YoY.

* Segmental: Health supplements, OTC & Ethicals, Oral Care, Hair Care, and Skin & Salon registered strong YoY growth of 34.7%, 28.5%, 28%, 13.7%, and 9.1%, respectively. The Foods business witnessed muted growth of 4.7% YoY. Home Care and Digestives remained flat YoY. The international business registered constant-currency growth of 14.1% YoY

* Standalone sales / EBITDA / adj. PAT grew 18.5%/15.7%/15.5% YoY. EBITDA margins contracted 50bp YoY to 21.9%. The domestic FMCG business reported growth of 19.5% YoY.

Highlights from management commentary

* Channel inventory is now ~13 days, from ~21 days at the beginning of the year, which is remarkable given the pace of new launches.

* New products contributed 4–5% to revenues in 3QFY21, with most new products doing very well – except Sanitizers, in which demand collapsed after 1QFY21.

* Its direct reach, in ~1.3m outlets currently, would reach 1.4m outlets by the end of the year (as targeted), thereby adding 0.2m outlets in the year.

* No impact was seen from the honey contamination issue after the FSSAI clearance; market share in Honey grew 700bp YoY in 3QFY21.

Valuation and view

* Changes to the model have resulted in a 4–6% increase in FY21/FY22/FY23E EPS forecasts.

* As indicated in our upgrade note, the structural and medium-term narrative on topline growth is turning highly attractive – led by strong traction in the profitable Healthcare business and an attractive rural growth outlook (~48% of domestic sales from rural). Additionally, the investment case is being strengthened further, supported by: (a) focus on the core, (b) power brand strategy, (c) a spate of new launches, (d) an increasing direct distribution reach, (e) the 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 longer term potential of the business, valuations at 45.4x FY22E and 38.8x FY23E do not appear challenging. Maintain Buy, with TP of INR640 (50x Dec'22 EPS).

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