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Dabur India Ltd. (DABUR) Sep’24 quarter was marred by strategic decision of rationalization of inventory in the General Trade (GT) channel and impact from heavy rains & floods on the business especially the beverages portfolio. India FMCG sales was down by ~7.6% but secondary sales for the quarter grew at over 2%. International business reported strong constant currency (CC) growth of 13% YoY but due to currency conversion impact, reported INR growth stood at 3.3%. With rural footprint of >122k villages now for Dabur, rural growth outpaced urban growth by 130bps in 2QFY25. With expectation of recovery in consumer demand in the coming quarters, both in urban and rural markets, domestic volume trajectory should improve. Dabur has been our preferred top pick within the FMCG pack especially with the ongoing rural recovery (rural forms ~50% of domestic business). But the recovery as well as the stock price were impacted by the inventory correction. We continue to remain positive on better growth going forward but also remain watchful on competitive pressure in key categories. We maintain our BUY rating with a revised target price (TP) of Rs700 (Rs765 earlier), ~48x on FY’27E EPS.

2QFY25 Result Highlights

* Headline performance: Consolidated revenues de-grew by 5.5% YoY (-3% CC growth) to Rs30.3bn (vs est. Rs30.4bn). EBITDA was down 16.4% YoY to Rs5.5bn (vs est. Rs5.6bn). Adjusted PAT (APAT) was down 17.5% YoY to Rs4.3bn (vs est. Rs4.2bn).

* India FMCG volume de-grew by ~7.5% (in-line with our est.). International Business (28.4% to consol. sales in 2QFY25) reported a growth of 13% in CC terms.

* Consol. gross margin was up 100bps YoY to 49.3% (up 160bps QoQ). Operating deleverage meant that EBITDA margin was down by 240bps YoY to 18.2%. A&P spends up ~70bps YoY (media spends grew by 4.2% in the consolidated business and de-grew by 4.7% in the India business).

* 2QFY25 Standalone revenue, EBITDA and APAT de-grew by 8.2%, 20.7% and 21.7% YoY, respectively. Gross margin was down 20bps YoY to 46.6% while EBITDA margin stood at 18.8% (down 300bps YoY).

* 1HFY25 Consol. revenue, EBITDA and APAT grew by 0.7%, -4.6% and -5.5% YoY, respectively. Gross margin was up 110bps YoY to 48.5% while EBITDA margin stood at 18.9% (down 100bps YoY).

Key highlights from conference call: (1) Dabur expects urban slowdown to have bottomed-out and should see improvement going forward. (2) Dabur expects to grow by mid to high single digit in 2HFY25 subject to strong winter season and normalized industry growth. (3) The company expects margins to remain flattish for FY25.

View & Valuation

We now build 9.1% revenue CAGR over FY24-FY27E driven by: (a) Reaping benefits from rural recovery and distribution expansion (rural coverage of >122k villages which is highest in the industry). Direct reach now stands at ~1.42mn outlets with total reach of ~7.9mn outlets. (b) 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. (c) Expanding TAM through power platform strategy and innovations gives decent visibility for long-term growth. (d) Improved INR growth in International business as it laps up currency impact. At operating level, we expect ~10.4% EBITDA CAGR over FY24-FY27E (~70bps EBITDA margin expansion led by gross margin expansion of 120bps). ‘Namaste’ litigations remain an overhang as it might take 1-1.5 years more to settle but legal cost has come down in FY25. Dabur has been our preferred top pick within the FMCG pack especially with the ongoing rural recovery (rural forms ~50% of domestic business). But the recovery as well as the stock price were impacted by the inventory correction. We continue to remain positive on better growth going forward but remain watchful on competitive pressure in key categories. We maintain our BUY rating with a revised TP of Rs700 (Rs765 earlier), ~48x on FY’27E EPS.

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