IGI Logo

In-line quarter; positive commentary for 2HFY25

* Dabur’s 2QFY25 performance was largely in line with our estimate. Consolidated revenue declined 5% YoY (in line) primarily due to a temporary adjustment in General Trade (GT) inventory because of the growth in emerging channels. India revenue declined 8% YoY, while secondary sales grew by 2%. Urban demand has moderated (MGT expects bottoming out), with rural demand outpacing it by 130bp in secondary sales. International business grew 13% YoY in CC terms.

* Home & Personal Care/Healthcare/F&B’s reported sales declined 8%/10%/ 21% YoY, while Home & Personal Care/Healthcare’s secondary sales grew 6%/4% but F&B’s sales dipped 11% YoY. In secondary sales, oral care grew by 5% (lower than peers after a long time), while home care achieved robust growth of 9%. The digestives segment increased 9% YoY, and foods posted a strong 21% growth. Beverages declined 12% YoY due to heavy rainfall. Badshah continued its strong trajectory with 15% growth.

* GM improved 100bp YoY to 49.3% (est. 48.4%). Conversely, EBITDA margin contracted 240bp YoY to 18.2% (in line) on operating deleverage. EBITDA declined 16% YoY.

* Dabur has also announced acquisition of Sesa Care, a leading ayurvedic hair oil brand, at a valuation of 2.4x of EV/sales and 19-20x of EV/EBITDA. EV (including debt) estimated at INR3.15-3.25b. Emami had acquired Kesh King at ~7x of EV/sales in 2015.

* We expect that Dabur will deliver high-single-digit revenue growth in 2HFY25, driven by healthy rural (50% mix), seasonal tailwinds, and the company's initiatives for distribution expansion, new product launches, and increased brand visibility. We value Dabur at 50x Sep’26E EPS to arrive at our TP of INR700. We reiterate our BUY rating on the stock.

Weaker performance due to GT inventory correction

Consolidated

* Weak reported performance: Dabur’s 2QFY25 consolidated sales declined 5.5% (in line) to INR30.3b (est. INR30.4b). India revenue declined by 7.6% while secondary growth was at 2.3%. International CC growth was 13% YoY. EBITDA/PBT/adj. PAT decreased 16%/16%/17% YoY to INR5.5b/INR5.5b/ INR4.3b (est. INR5.5b/INR5.4b/ INR4.4b).

* HPC business delivers 6% YoY secondary sales growth: HPC reported sales decline 8% YoY on inventory rationalization. Oral care’s secondary sales clocked 5% growth. Dabur Red Toothpaste continued to gain market share. Hair Oil, Home Care, Shampoo, and Skin Care clocked 4%, 9%, 3%, and flat YoY secondary growth, respectively.

* F&B reported 11% YoY decline in secondary growth: F&B business reported sales decline of 21% YoY with secondary decline of 11%. Secondary sales for the food business delivered 21% growth, while beverages declined 12% YoY. Beverages were hit by the heavy monsoon and floods. Badshah revenue was up 15% YoY.

* Healthcare portfolio delivers 4% YoY secondary growth: Healthcare reported sales decline 10%. Health supplements rose 3% YoY, Digestive was up 6% YoY, while OTC & Ethicals were flat YoY.

* Operating margin contraction: Gross margin expanded 100bp YoY to 49.3% (est. 48.4%). As a percentage of sales, ad-spending rose 70bp YoY to 7.5%, other expenses were up 140bp YoY to 12.5%, and staff costs grew 135bp YoY to 11.2%. EBITDA margin contracted 240bp to 18.2% (est. 18.2%).

* International business delivers double-digit growth: International business grew 13% in CC terms in 2QFY25. Egypt business grew 73% YoY, while Turkey business was up 3% YoY, and the Middle East markets posted a growth of 10% YoY. The Sub-Saharan Africa (SSA) business rose 26.1% YoY.

* 1HFY25 revenue remained flat at INR63.7b, while EBITDA and APAT declined to 4.6% and 5.4%, respectively. In 2HFY25, we model sales/EBITDA/APAT growth of 7%/10%/10%.

Highlights from the management commentary

* There is a moderation in urban demand, hit by sustained food inflation and adverse weather. Company sees urban consumption is bottoming out.

* Rural demand outpaced urban by 130bp in secondary sales. According to Nielsen data, rural growth was 600bp higher than urban during the quarter.

* Quick commerce channels are expanding swiftly, altering traditional sales landscapes, particularly in urban areas.

* The company expects mid-to-high single-digit revenue growth and flat margin expansion in 2HFY25.

* Distributor ROI has been improved with the reduction in inventory days from 30 days to 21 days after inventory correction. Dabur plans to bring it down further to 19 days by Dec’24.

Valuation and view

* There are no material changes to our FY25E/FY26E estimates.

* DABUR mitigated the impact of inflationary pressures through disciplined cost control, operational efficiencies, and judicious price increases. With a broader distribution reach (to ~0.12m villages and ~7.9m outlets), increased direct penetration (~1.4m outlets), and extensive presence/categorical leadership in the rural market, DABUR is better positioned to capitalize on the rural consumption trend compared to its peers.

* The operating margin, which has been hovering around the 20% band over the last 8-9 years (unlike its peers that have experienced expansions), also has room for expansion in the medium term.

* With external drivers remaining consistent, we view the recent stock price correction as an opportunity to be constructive on the stock. Once the company’s growth trajectory improves, we expect a re-rating potential in the stock. We reiterate our BUY rating on the stock with a TP of INR700 (premised on 50x P/E on Sep’26).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412