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Result better than expected; margin headwinds lesser than peers

* Driven by very strong growth in HPC and more so in F&B, DABUR’s 2QFY22 result comfortably beat our sales growth forecasts, even as Healthcare sales, as expected, slowed down on the back of a high base.

* Healthcare sales posted a 19% CAGR over a two-year period, and its medium-term prospects are attractive.

* Consolidated sales/volume growth of 12%/10% YoY in 2QFY22 on a growth of 14%/17% in the base quarter is truly remarkable. Gross/EBITDA margin was ahead of our expectation, leading to a double-digit beat on our operating profit estimate.

* From a near-term perspective, two factors distinguish DABUR from other Staples peers: a) its better performance and outlook on rural India, and b) dominant market share in its key categories, leading to a superior ability to pass on the ongoing material cost inflation. The company has taken requisite price increases in nearly 90% of its portfolio.

* Good visibility v/s its peers on near-term topline and earnings, and a healthy long-term earnings opportunity deserves premium multiples. We maintain our Buy rating.

Performance better than expected

* Consolidated sales grew 12% YoY to INR28.2b (est. INR26.4b) in 2QFY22. EBITDA/PBT/adjusted PAT grew 9%/12.1%/4.7% YoY to INR6.2b/INR6.6b/INR5b (est. INR5.5b/INR5.8b/INR4.6b).

* India FMCG volumes grew by 10% YoY in 2QFY22.

* Gross margin contracted by 200bp YoY to 48.8% (est. 48.5%). As a percentage of sales, lower staff cost (-110bp YoY to 9.6%), ad spends (-90bp to 7.2%), and higher other expenses (+50bp to 10.1%) resulted in an EBITDA margin contraction of 60bp to 22% (est. 20.9%).

* The Healthcare segment declined by 4.8% YoY (Ayurvedic Ethicals and OTC +1.9%, Digestives +22.7%, and Health Supplements -13.6%). Home and Personal Care rose 16.7% YoY (Oral Care +13.3%, Skin Care and Salon - 11.9%, Shampoos +20.5%, Hair Oils +27.9%, and Home Care +25.3%). F&B grew 43% YoY (Beverages +45% and Foods +15.6%).

* The international business registered a constant-currency growth of 13.8% YoY.

Highlights from the management commentary

* Rural sales growth for DABUR was 12% on a 20% growth in the base quarter. Urban sales grew 9%. Sep’21 and Oct’21 were relatively slow months for rural India, but is expected to pick up again, led by the festive season in 3QFY22. DABUR’s rural expansion and LUP strategy have helped it outperform its peers.

* International markets have emerged from the COVID-19 crisis, and the management expects the double-digit growth to sustain.

* DABUR has passed on the entire cost increase in the F&B and Healthcare segments. In HPC (80% of the portfolio), it has taken the required price increases, barring Hair Oils and Hair Care, where the recovery is incipient. Market leadership across most categories enables it to take the required price increases.

* NPD contribution stood at 4.6% in 2QFY22 and is likely to be in the 4-5% range going forward as well.

Valuation and view

* There is no material change to our FY22E/FY23E estimate.

* The near term, medium term, and the structural narrative on topline growth is highly attractive, led by strong traction across domestic and international businesses even on a high base. Rural performance and outlook is better than peers, while material cost pressures are lower than its peers.

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

* Valuations at 48.8x FY23E EPS is not cheap, but the potential for earnings growth is much stronger going forward as the management initiatives underlined earlier yield benefits, leading to the sustaining of premium multiples. We maintain our Buy rating with a TP of INR705/share (50x Dec’23E EPS).

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