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2H earnings expectation robust; Upgrade to BUY

Dabur India Ltd. (DABUR) 2QFY24 performance was largely in-line with expectation. Even after taking a hit from ‘Namaste’s’ legal cost regarding litigation, it has delivered 20.6% EBITDA margin. In 2HFY24, management is targeting to deliver high single-digit to low double-digit growth. On margins, it is now aiming to deliver slightly better than the earlier FY24 target of 19.5%. In terms of the lawsuit on one of Dabur’s step-down subsidiary - Namaste, the management has assured that legal cost will be minimal (it was Rs360mn in 1Q, expected to be Rs200mn in 2Q and lower amount quarter after quarter), revenue impact is also low as portfolio contributes <1% of revenues (US relaxer revenues contributes even lower) and also continues to believe that there is no merit to the claims. It will remain an overhang as litigations are usually long drawn. There is valuation comfort post recent correction, this along with visibility of better earnings going forward makes us upgrade the stock to BUY from ADD earlier with a revised target price (TP) of Rs640.

Result Highlights (Consolidated)

* 2QFY24 headline performance: Consolidated revenues grew by 7.3% YoY to Rs32bn (vs est. Rs32.4bn). EBITDA was up 10% YoY to Rs6.6bn (vs est. Rs6.5bn). Like to like operating profit growth of 16% (ex-Namaste legal cost). Adjusted PAT (APAT) was up 5.1% YoY to Rs5.2bn (vs est. Rs5.1bn). PAT up 14.7% ex-legal cost & amortization.

* Underlying volume growth stood at 3% for the India FMCG business (vs est. of 4% YoY). International Business reported a growth of 23.6% in Constant Currency (CC) terms (10.4% in Rs terms).

* Consol. gross margin up 290bps YoY to 48.3% (up 170bps QoQ). Higher overheads: A&P spends up ~170bps YoY, other expenses up 50bps YoY and employee cost up 20bps YoY, meant that EBITDA margin was up by 50bps YoY to 20.6%.

Key near term outlook

(1) Management is looking at high single digit to low double-digit growth in balance half of FY24 with mid-single digit volume growth and around 3% pricing component.

(2) It expects to achieve 19.5% EBITDA margins or even better in FY24 on the back of deflation in commodity prices.

View & Valuation

We are currently building 9.7% revenue CAGR over FY23-FY26E. Key drivers: (a) Focus on gaining market share in key categories - DABUR’s Power Brand strategy of focusing on nine of its major brands –accounts for >70% of the company’s consolidated revenue, will continue to pay dividend in the medium to long term. (b) Distribution continues to expand – direct coverage will touch ~1.5mn outlets by end of FY24. Also, village coverage has seen a significant jump to 100k villages across the country from 59,217 villages in FY21. Ahead-ofthe-curve investments and expected improvement in rural demand augurs well for Dabur. (c) Expanding TAM through power platform strategy and innovations gives decent visibility for medium-term growth. At operating level, we expect ~13.3% EBITDA CAGR over FY23- FY26E (~190bps EBITDA margin expansion as we expect gross margin expansion of 420bps). ‘Namaste’ litigations remain an overhang as they are usually long drawn. Dabur is currently trading at ~49x/42x/37x on FY24E/FY25E/FY26E EPS, discount to its historical average, as we build in ~14% EPS CAGR. With improving commentary, better near-term earnings visibility, and valuation comfort, we upgrade the stock to BUY from ADD earlier with a revised TP of Rs640 (Rs625 earlier), valuing it at ~47x Sept’2025E EPS (3yr/5yr avg. fwd. multiple: ~54x/52x).

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