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We maintain our positive stance on Dabur India, encouraged by its diversified portfolio, which management is geared to leverage better, with improvement in the demand scenario. Q2FY24 topline grew 7%, with 3%/10% growth in the India/international business. Gross margin expansion of 295bps YoY absorbs the higher A&P spends (up 43% YoY) and litigation costs in USA (of Rs360mn), resulting in ~50bps expansion in EBITDA margin to 20.6%. Given the margin recovery, we forecast higher spend on brands; this would enhance brands’ growth prospects. Recent innovations have fared well, set to aid incremental growth. H2 performance is likely to be better vs H1, on a low base and clustering of festivals—expected to be a better season. We cut FY24E earnings by 2%, based on the H1 show; maintain BUY with Sep-24E TP of Rs650/sh (46x P/E).

Dabur India: Financial Snapshot (Consolidated)

Domestic sees soft growth (3%); International does well (10% growth)

Dabur posted 7.3% overall sales growth, with ~3% growth in domestic sales (@~3% vol. growth), while International sales grew 10% (@23.6% constant currency growth). In the domestic business, Beverages put up a poor show, with a 10% YoY drop, hurt by intense rains in North India and delayed loading due to this year seeing shift in the festive season. Adjusted for Beverages, domestic sales grew 6%, with 5% volume growth. The management noted that 90% of the business sustained mkt-share gains. HPC segment (50% of sales) grew 5.7% YoY, with 14% growth in Homecare. Healthcare (30% of sales) saw only 5% growth, hit by a 7% slip in Chyawanprash sales (delayed loading). International sales were robust, credited to growth of 35% in Egypt and 79% in Turkey.

Better margins (up 50% YoY to 20.6%) aided the 10% EBITDA growth

Gross margin expanded by 295bps YoY/170bps QoQ to 48.3%, paving the way for higher A&P spend. In Q2, absolute A&P spend rose 43% YoY, implying a ~170bps YoY increase, as a % of sales, to 6.8%. With trade-related promotions, Dabur’s A&P spend is ~7.5-8% of sales; the spend is likely to increase to 8-10% going ahead, as Dabur sees need for added spends on categories like Oral-care, Home-care and Chyawanprash. In Q2, Dabur recorded a US litigation-related spend of Rs360mn, which is likely to reduce going ahead to Rs200-220mn; such spends would linger for a couple of years. EBITDA/earnings grew 10%/7%; adjusted for litigation costs, EBITDA/earnings grew 16%/15%, respectively.

All eyes on festive-quarter delivery; maintain BUY on firm fundamentals

Our sustained constructive outlook on Dabur is on account of: 1) its focused strategy to drive share and penetration; 2) portfolio transformation for aligning with evolving trends; 3) category extensions; 4) strengthening of the distribution moat; and 5) its funding muscle for inorganic opportunities. Factoring-in the near-term weakness, we cut FY24- 26E topline by 1%, leading to an almost 2% FY24E earnings cut on higher A&P spends. We maintain BUY on the stock, with target price of Rs650/share.

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