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Healthcare growth moderates as Covid-led tailwinds recede

* Dabur posted disappointing results in Q4FY21 with sales/PAT missing estimates by 7%/ 20%. Sales grew 25% to Rs23.8bn, led by 28% growth in domestic FMCG and 19% growth in the international business. Domestic gross margins fell 250bps on higher input prices.

* Q4 was partly affected by low stocking, while secondary sales growth was better. However, despite the low stocking impact, sequential slowdown in healthcare was high. Though Q1FY22 could boost healthcare growth again, concerns remain over a post-pandemic slowdown. Management targets low single-digit growth in health supplements for FY22.

* Management expects to protect margins with pricing actions and cost saving programs. Further price hikes in Q1 and some moderation in input prices are expected to improve margins sequentially. Our forecasts include margin gains of 120bps over FY22-23.

* We reduce FY22E/23E earnings by 10%/8% on lower growth and margin assumptions. Valuations at 42x FY23E EPS restrict near term upsides. Retain Hold with a TP of Rs530.

Domestic performance slows down sequentially, partly impacted by reduced stocking:

Domestic FMCG business recorded sales/volume growth of 28%/25%, driven by low comparables (17% decline in Q4FY20), but growth rates seem lower sequentially (2-year CAGR of 3.7% vs. 11.5% in Q3). Home & Personal care grew 33%, led by 45% growth in the toothpaste business on low comparables and 26% growth in hair care. Foods grew 28% as discretionary spends improved; however, healthcare slowed down to 23%, with health supplements growing 18%. International business grew 21% in CC terms and is expected to clock double-digit growth ahead. Management indicated some impact of reduced stocking on account of implementation of CRS (reduced trade inventory by ~6-7 days) in the domestic business. Dabur expects healthcare to pick up again in Q1 on account of Covi-19 but expects low single-digit growth for the year due to high comparables.

Margin miss; pricing actions and cost savings to protect margins:

Overall margins were stable due to gains in the international business. Domestic margins were under pressure with gross/EBITDA margins down 250bps/320bps due to commodity price inflation to the tune of 6% and higher staff costs and ad spends. Dabur has already effected a 3% price increase and has planned further pricing actions to mitigate input inflation. Ad spends increased 54% on low comparables. Staff cost increased 25% due to bonus reversal last year. Management expects to protect margins ahead with price hikes and cost savings.

Reduce earnings by 8-10%; maintain Hold:

We reduce FY22/23 earnings estimates by 10%/8% on account of reduced growth and margin assumptions. We like Dabur’s aggression on portfolio expansion; however, growth momentum is likely to be slower as healthcare growth moderates. Valuations at 42x FY23E EPS offer limited upsides. Retain Hold with a revised TP of Rs530 (from Rs560 earlier) based on 40x Jun’23E EPS.

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