Dabur: sailing in rough seas
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Dabur India Ltd’s management painted a cautious outlook for FY17 after declaring its March quarter results, expecting an improvement only in the second half. What seemed cautious then seems realistic now. It reported a 4% increase in volume in the domestic market, compared with the 7% growth in the preceding quarter.
The June quarter’s figure was lower than the 5-6% analysts were expecting. At the consolidated level, the company’s net sales rose by only 1.2% over a year ago. This is also due to the change in accounting standards to IND-AS. Under the earlier accounting rules, sales growth would have come to about 3%.
In the domestic market, sales growth was a mere 0.5% from a year ago. This is chiefly attributable to a sluggish market, as overall trends in demand remain weak. Dabur also flagged off a disruption in trade purchases as a reason due to a new PAN (permanent account number issued by the tax department) disclosure requirement for making purchases more than a certain amount. This affected sales chiefly in North India, a main market for the company.
In domestic home and personal care, its largest segment, Dabur’s oral care products did well, with sales growing 11.6% although the market was flat.
Home care products saw sales rise 2%. Other parts of this business, such as skin care, hair oils and shampoo did not do as well. Health supplement sales volume rose 6.7% and Dabur said honey sales have recovered. But promotions have meant its sales growth has been flat.
The company said that it has stepped up promotional activity such as offering more volume at the same price to spur consumption. Since demand is not expected to recover soon, promotions are expected to continue, keeping the pressure on value sales growth.
Advertising costs have declined in this quarter, as the mix shifted more towards promotions and under the new accounting standards, these are netted off directly from sales. But Dabur expects advertising costs to also increase to support its effort to revive sales growth.
In Dabur’s international business, organic sales growth rose 6.8% and it said the geopolitical situation in the West Asia and North Africa region has affected its sales growth.
While sales growth suffered, the decline in input costs meant the company’s Ebitda still rose, by 8.7% over a year ago and net profit (after minority interests) rose 11.8%. Dabur’s management retains a bearish outlook, and is not sure if even a good monsoon can revive rural demand (it believes government spending can play a bigger role) and whether central government pay hikes will have that significant an impact. If demand remains sluggish but input costs begin to increase, that’s a risk to watch for. Dabur’s shares have risen in the current fiscal, although they have tapered off recently. With its management in a wait and watch mode, there is no reason for investors to be gung-ho.