Dabur India Ltd’s international business normally grows ahead of its domestic business. But the December quarter saw a reversal, as its international business was to blame for the relatively slower 12.3% growth in sales to Rs.1,630.7 crore from a year earlier. The company’s domestic business sales rose by 14.3%, but its international revenues rose by only 9%.
Dabur’s Namaste business was the key reason for slower growth, as its revenue has been disrupted because of a restructuring of distribution in Africa and a rebranding exercise in the US. That is affecting reported sales and will eventually correct. The rest of the international business did well, with sales growing by 22.4%.
But Dabur’s domestic business appears to be doing well, considering that Hindustan Unilever Ltd—the market leader—saw volume sales growth of only 5%. Dabur said its volume growth was just below the 10% mark, indicating that price hikes played a relatively moderate role. The company management said in a conference call that it sees stable demand for staples, compared with higher-end products as discretionary spends come under pressure. It also said that it was conservative with price hikes so as to not hurt demand.
That is a wise strategy, as Dabur’s cost of goods sold as a percentage of revenue has declined during the quarter. That gave it headroom to step up advertising and promotional spending, which grew by 18.6%, and manage a 19.9% hike in its salary bill.
Its operating profit margin widened by 93 basis points from a year ago, but fell sequentially by 85 basis points. In its domestic business, except for digestives, most of its categories in the home and personal care segment did well. Among large categories, hair care products, oral care products, and over-the-counter and ethical products did well, though health supplements saw slower growth compared with the first half. Sales of health supplements were affected by lower offtake of Chyawanprash by the canteen stores department (CSD) channel. Though its food product sales grew well, margins were affected because of an increase in imported raw material costs.
Dabur’s net profit rose by 22.1% over the year-ago period, partly due to a sharp decline in interest costs, which it attributed to forex-related fluctuations. Its operating profit rose by 18.9%, which is more representative of its performance.
Dabur’s performance on the international front may continue to be impacted by the Namaste factor for some more time. In the domestic business, its ability to maintain volume growth at these rates is a key factor to watch.
The company is confident that an 8-12% volume growth range is achievable, and since discretionary items contribute only 10% of its sales, it does not expect a significant impact from slower demand for such goods. Rural markets continue to support growth, urban markets are growing at a more sedate pace, while CSD demand has been volatile.
The company’s strategy of keeping price hikes moderate should serve it well, at a time when consumer inflation continues to be high.
Still, Dabur’s shares fell by 1% on Tuesday, after earnings were announced. It trades at 25 times estimated earnings per share for 2013-14, according to a Thomson Reuters poll. Investors may consider that expensive, after looking at its core operating profit growth and at the fact that the international business may weigh down on sales growth for some more time. An upturn in the Namaste business and domestic volume growth trends should be factors to watch out for.