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Dabur India Ltd. (DABUR) 1QFY25 result highlights sequential recovery in volume growth, driven by rural markets. With rural footprint of >122k villages now for Dabur, rural growth outpaced urban growth by 350bps in 1QFY25. The fact that rural growth has not slackened in July’2024, gives confidence of improvement in domestic FMCG volume growth even going forward. Consolidated constant currency (CC) growth stood at 9.8% but translated INR growth continued to be impacted by severe currency depreciation in Turkey and Egypt. Within domestic categories, apart from Beverages (nectars portfolio impacted by harsh summers and price cuts in cola by peers), Hair Oil and OTC & Ethicals (impacted by high base), rest of portfolio saw robust growth. Dabur has been our preferred top pick for FY25 within the FMCG pack and has now delivered ~27% return in past three months. We continue to remain positive on rural driven volume growth improvement and believe Dabur with ~45% rural mix should benefit more relatively. We maintain our BUY rating with a revised target price (TP) of Rs765 (Rs665).

Result Highlights

* Headline performance: Consolidated revenues grew by 7% YoY (10% CC growth) to Rs33.5bn (vs est. Rs33.2bn). EBITDA was up 8.3% YoY to Rs6.6bn (vs est. Rs6.5bn). Adjusted PAT (APAT) was up 6.6% YoY to Rs4.9bn (vs est. Rs4.9bn).

* India FMCG Volume growth (including Badshah) stood at 5.2% (vs est. of 5.0% YoY). (23% to consol. sales in 1QFY25) reported a growth of 18.4% in Constant Currency (CC) terms but INR growth stood at just 5.6% due to currency devaluation impact.

* Consol. gross margin was up 120bps YoY to 47.8% (down 80bps QoQ). Increase in overheads: A&P spends up ~50bps YoY (media spends up by 15.4% in the Consolidated business; up by 12.8% in the India business), other expenses up 30bps YoY and employee cost were up 10bps YoY. EBITDA margin thus up by 20bps YoY to 19.6%.

* Standalone revenue, EBITDA & APAT grew by 7.1%, 7.5% & 7.3% YoY, respectively. Gross/EBITDA margin up 70bps/10bps YoY to 45.1%/19.8%.

Key highlights from conference call (detailed takeaways below)

(1) Rural growth is improving QoQ and has not slackened in July’2024. Sub-stockiest doing well and even inventory levels are coming down in rural markets.

(2) Currency devaluation impact in emerging international markets to start reducing from 3QFY25 onwards.

View & Valuation

We now build 10% revenue CAGR over FY24-FY26E driven by: (a) Distribution expansion– rural coverage of more than 122k villages which is highest in the industry. Direct reach of the company now stands at ~1.42mn outlets with a total reach of ~7.9mn outlets. To cater to this wider network, Dabur has expanded its product basket with the launch of newer affordable and rural-specific pack bundles across categories, besides investing in consumer activations in the hinterland. Ahead-of-the-curve investments and further demand improvement in rural augurs well for Dabur. (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 medium-term growth. At operating level, we expect ~13.3% EBITDA CAGR over FY24-FY26E (~120bps EBITDA margin expansion led by gross margin expansion of 100bps). ‘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 for FY25 within the FMCG large cap pack and has now delivered ~27% return in past three months. It is currently trading at ~55x/47x on FY25E/FY26E EPS, as we build in 15.3% EPS CAGR over FY24-26E. We continue to remain positive on rural driven volume growth improvement and believe Dabur with ~45% rural mix should benefit more relatively. We maintain our BUY rating with a revised TP of Rs765 (Rs665), ~51x on Sep’26E EPS.

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