Consumer goods company Dabur India Ltd’s stock price peaked at ₹659 in September 2021 following strong results in the June 2021 quarter (Q1FY22) during which it clocked 34% volume growth year-on-year.
Ignoring that it had come off a low base owing to the impact of the covid-19 pandemic in the base quarter, investors extrapolated such strong growth would continue well into the future. This optimism has come at a cost, as the stock price still lags nearly 15% below its peak even after almost three years.
Since Q1FY22, sales volume growth has never exceeded double digits in any quarter, including the March quarter (Q4FY24).
Dabur’s consolidated sales grew by 5% year-on-year in Q4FY24. While international volume growth data is not available, domestic volume growth was 4.2%. As India accounted for 74% of total sales, it can be safely concluded that the consolidated topline growth also came in mainly from higher volumes.
Despite higher sales, material costs stayed flat, enabling the 280 basis points (bps) expansion in gross margin to 48.6%. A bulk of it has been reinvested in brand building as the advertising cost rose by 21.1% year-on-year to ₹184 crore. Consequently, the margin expansion at Ebitda level was 160 bps to 16.9%. The Ebitda margin is adjusted for the legal costs of Namaste, a subsidiary in America.
It was the stellar performance of home and personal care (HPC) segment with 8.7% growth that helped overcome the lackluster performance of other divisions. While healthcare sales fell by 1.5%, food and beverage segment remained flat. Still, Dabur has gained market share in most of the product across healthcare segment indicating that the industry as a whole had a soft quarter due to the delayed onset of winter.
Dabur’s rural growth outpaced the urban growth during the quarter reflecting the results of increasing rural coverage. It has expanded its reach by almost 20% to 122,000 villages in the last year, which is one of the highest in the industry. Along with that, other initiatives like introducing new rural-specific packaging across various categories have also aided in boosting consumer base.
Among international subsidiaries, Namaste reported an 11% drop in revenues amid ongoing legal cases. The company clarified that the cases do not have any impact on other group companies or their products. The negative impact is confined to the US market. Notwithstanding that, there was a 12% growth in the international business in constant currency during the quarter.
This growth is attributed to substantial growth across regions, including the MENA region at 6.3%, Egypt at 63%, Turkey at 39% and Sub-Saharan Africa at 23.8%.
Road ahead
There is the expectation of higher rains in the coming monsoon season due to the La Nina effect, which should further boost rural income and demand. If it helps Dabur achieve double-digit volume growth along with some pricing power, there is a possibility the company may beat its 17% profit growth of FY24 by at least a couple of percentage points.
Assuming a 20% growth rate for FY25, the stock is trading at a price-to-earnings multiple of about 40x for FY25. That is not too expensive keeping in mind the valuation of other FMCG stocks.
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