Dabur India Ltd joined the legion of packaged consumer goods firms reporting eye-watering growth rates, helped by a low base and the return of a more normal market situation after the roll-out of the goods and services tax (GST). While Dabur’s profitability rose substantially, it may be tested by the company holding on to sticker prices in the next few quarters, even as costs increase. In categories such as foods, where sales growth is flagging, the company may settle for lower margins to get higher growth.

Dabur’s domestic sales (adjusted for GST’s accounting effects) rose by 17.7% from a year ago, while volumes grew by 13% and would have been higher but for flat growth in its foods business. Its international business saw sales increase by 5% on a constant currency basis, pulling down overall adjusted constant currency sales growth to 12.9%.

The highlight of Dabur’s results was its home and personal care business, which grew by 22.9% led by growth in segments such as oral care, hair oils, shampoos and home care. In the healthcare segment, which includes health supplements such as chyawanprash and honey, sales rose by 16.6%. Dabur seems to have responded well to the challenge from Patanjali Ayurved Ltd in some of its main products such as oral care and honey. Even in the September quarter, sales growth was relatively healthy. The fading away of this threat, for now, should come as a relief to investors.

In foods, there were some one-off effects such as a high growth in the base quarter a year ago and an earlier Diwali, which saw gifting sales shift to the second quarter. Competition too is playing a role, however. The company’s management said it will sacrifice some margins if need be in this category, to revive sales growth.

Contrary to what other firms have been saying, Dabur’s management said that demand has slowed down in the current fiscal year and it is looking forward to the government’s measures in the budget to boost rural demand. If Dabur’s sales growth still looks cheery, it attributes that to its own efforts and indicates it has taken share from its competitors or by improving availability of its products. Till demand growth revives, that will remain its primary source of sales growth.

The company’s margins widened by 180 basis points from a year ago, after adjusting for GST. This can last for a quarter or so, as it still has inventories of materials bought when prices were cheaper. But inputs such as crude oil-based derivatives and coconut oil have become expensive. Eventually, these will see costs rise. If demand remains weak, Dabur may prefer to absorb some of those increases so that volume growth remains robust. Also, the government’s frowning upon price increases during the initial quarters of GST may see it restrain itself from hiking prices. These margins, therefore, should not be taken for granted.

The international business performance is a bit disappointing, as it is for most consumer goods firms that ventured overseas. Dabur expects this to improve from the fourth quarter, as underlying conditions in the countries it is present in are improving. Translation losses due to currency fluctuations are expected to be lower as well, which affects reported growth.

Dabur appears to be in a good place and that explains why its shares have done well in recent quarters. They are trading at 39 times the projected earnings per share for FY19, based on the mean of analyst estimates compiled by Reuters. What could lend this relatively high valuation more support is if consumer demand steps up even by a bit while the main risk is from input cost inflation rising higher than expected.

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