Dabur Q1 results may have set investor expectations high
If Dabur can sustain the volumes differential with FMCG peers through the year, then investors could give it a premium over the others
Dabur India Ltd may have unwittingly set investor expectations very high. Its domestic business grew 21% by volume in the June quarter, leading to a 7% jump in the share price. Its volume growth is much higher than what peers have reported. Hindustan Unilever Ltd (HUL) had 11% volume growth while Godrej Consumer Products Ltd reported 14% growth. If Dabur can sustain this differential through the year, then investors could give it a premium over the others.
A few external and some internal events could help or hinder this effort.
In value terms, the company’s domestic business grew 24%, while the international business saw a relatively sedate 10.5% growth in constant currency.
For the moment, all eyes are on the domestic business.
Like other firms, Dabur’s domestic sales growth too has a low-base effect behind it, with volume growth falling 4.4% in the year-ago period.
Reported growth rates will likely taper from the September quarter onward, but investors will be keen to know by how much.
First, Dabur’s sales growth last quarter was almost equal in both urban and rural markets, according to a CNBC-TV18 interview with chief executive officer Sunil Duggal. That is good because rural markets are expected to see higher growth in the foreseeable future.
A combination of a normal monsoon forecast, higher support prices and other populist measures are expected to drive up rural spending. If Dabur’s growth in rural markets picks up in the coming quarters as expected, that will support overall growth.
Second, the company plans to stay focused on volume growth. One reason for higher growth in the June quarter could be higher advertising spend. Its consolidated advertising expense grew 33% and the management does not plan to scale back. Advertising took away 9.6% of sales in the June quarter and Dabur is happy with a range of 8-10%.
Lastly, while competition will always be stiff in the market, Patanjali Ayurved Ltd’s onslaught and its effect on companies such as Dabur appears to have lessened. Dabur has shown substantial growth in categories such as oral care and honey.
Perhaps, Patanjali may have triggered the shift in consumer preference to herbal-based products, but Dabur may have done a better job of riding that wave.
All this lends some credibility to the CEO’s estimate of a double-digit growth in volume for the full year. Although price has played a very small part so far, that may change depending on how much costs increase by in the rest of FY19 and if rivals increase prices or not.
The company is putting its weight behind volume growth, across categories. Success in that metric holds the key to earnings growth as well, since other expenses such as advertising or even price increases will then play second fiddle. If volume growth accelerates as expected, then Dabur will also spread its fixed costs across a larger revenue base, which will then see profitability increase.
It’s a robust strategy for a consumer goods company to follow in a market where demand is increasing. The risks are mostly external such as bad weather affecting agricultural income or a spike in input costs. Aggressive competition is another. Any adverse development in its international business, such as currency volatility, could affect its performance too.
Dabur’s net profit rose 25% over a year ago. Its shares trade at 47 times its FY19 estimated earnings, based on the mean of estimates compiled by Reuters. That’s fairly expensive. Given that the September quarter will show how growth looks without a low-base effect, it will give a better idea of what to expect.
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