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Beat on all fronts; future outlook ‘healthy’

* DABUR’s 1QFY22 result came in above our expectations on all fronts. The management’s confidence on: a) double-digit sales growth prospects for FY22, despite a challenging base for the Healthcare business in the remaining quarters, and b) target of maintaining or growing FY22 EBITDA margin YoY, despite the ongoing rise in material costs, is encouraging.

* The management’s initiatives in the last two years of: a) a spate of new launches, b) sharp increase in advertising spends, c) continued expansion in distribution, d) investment in technology and Analytics, and e) cost saving efforts plowed back into the business for growth has set DABUR on the right path towards a much stronger topline and earnings growth trajectory, commensurate with the inherent potential in its Healthcare, Foods, and HPC businesses.

* DABUR has delivered double-digit topline growth in two of the past three years, unlike most peers, and is likely to do so again in FY22. New products now contribute 5-6% of sales. Earnings growth, after the ongoing investment in these initiatives, will be even stronger than topline growth after completion of the investment phase for the above mentioned initiatives (and a temporary reset on account of a step up in taxation levels to 22% in FY22 from 17.6% in FY21). We maintain our BUY rating.

Beat on all fronts

* Consolidated sales grew 31.9% YoY to INR26.1b (est. INR23.4b) in 1QFY22. EBITDA/PBT/adjusted PAT grew 32.5%/34%/28% YoY to INR5.5b/INR5.7b/INR4.4b (est. INR4.8b/INR5b/INR3.9b).

* India FMCG volumes grew 34.4% YoY in 1QFY22.

* Gross margin contracted by 130bp YoY to 48.1% (est. 48.9%). As a percentage of sales, lower staff cost/ad spends (-140bp/-10bp YoY to 9.9%/7.2%), and higher other expenses (+10bp to 9.9%) resulted in an EBITDA margin expansion of 10bp to 21.1% (est. 20.5%).

* The Healthcare segment grew 30% YoY (Ayurvedic Ethicals +50.8%, OTC +52.3%, Digestives +16.2%, Health Supplements +24.5%). Home and Personal care rose 26.1% YoY (Oral Care +21.1%, Skin Care and Salon -5.4%, Shampoos +41.3%, Hair Oils +38.4%, and Home Care +30.6%). F&B grew 80.4% YoY (Beverages +85% and Foods +17.8%).

* The international business registered constant-currency growth of 34.2% YoY.

Highlights from the management commentary

* The management is confident of double-digit sales growth in FY22, as long as the third wave does not cause disruptions. The International business (~26% of 1QFY22 sales) is likely to report double-digit sales growth in FY22

* RM cost inflation of 9-10% is being witnessed currently. The management expects inflation to moderate in 2HFY22. It has been able to manage EBITDA margin well in 1Q, and expects FY22 operating margin to be flat or increase YoY. DABUR hiked prices by 3% and undertook INR200m in cost savings in 1QFY22.

* Cost savings of INR1b are targeted in FY22 as part of Project Samriddhi (it had saved ~INR0.5b in FY21 – the first year of this program).

* NPD constitute 5-6% of overall sales and 8-10% of Foods. Apart from Foods, Healthcare launches are doing very well. Within HPC, new launches in some categories like Oral Care are performing well. Baby Care products are performing well in the e-commerce channel.

Valuation and view

* There is no material change to our estimates after its 1QFY22 result.

* As indicated in our upgrade note in Jul’20, 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 Healthcare business, b) DABUR’s 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.

* Valuations at 48.4x FY23E EPS are not cheap, but the potential for earnings growth is much stronger going forward as management initiatives underlined earlier yield benefits, leading to the sustaining of premium multiples. We maintain our Buy rating with a TP of INR715/share (50x Sep’23E EPS).

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