Dabur India—waiting for the lull to pass
The management is not unduly worried about its domestic market growth and is confident that a focus on volume growth will help it, when the market revives
Dabur India Ltd’s June quarter results have given investors some pause for thought. Since it reported earnings, Dabur’s shares have lost 2.2%. Domestic volume growth at 8.1% was the same as in the March quarter, while investors may have hoped that this will improve. Sales growth at 11.6% also indicates that pricing power continues to remain low. The international business growth was subdued, pulling down overall growth.
Dabur’s focus is to maintain volume growth and pass on material price reductions to customers to try and grow market share. But market conditions are weak. Rural growth is slowing, while urban growth has inched ahead, it said, with the numbers at 10.5% and 12%, respectively.
It also said that tight money conditions have made finance expensive and distributors are keeping light inventories, which is affecting sales (companies sell to stores through distributors).
The company’s overall revenue grew by 10.7% but falling commodity prices led to a mere 3.5% increase in its material cost. But it pumped money into advertising, paying salary hikes and other expenses. Even then, its operating profit margin rose by 1.2 percentage points to 15.5% from a year ago, while its net profit rose 23.8%.
But Dabur’s revenue growth was uneven. In its home market, hair care sales grew by 12.7% while oral care sales grew by 17.5%, with their combined contribution to domestic sales at 39%. But home care, skincare, health supplements and digestives (together 29% of sales) saw low growth ranging from 1.2% to 5.2%. That pulled down overall growth. Foods did well, however. International business was soft, with sales rising by only 7.4% on a constant currency basis.
Dabur’s management is not unduly worried about its domestic market growth and is confident that a focus on volume growth will help it, when the market revives.
Meanwhile, it will do what it takes to tackle specific problems in its portfolio/marketing. It aims to turn its focus back to over-the-counter products and is setting up a team to market these products to consumers via doctors.
The stock was range-bound in the past six months but has gained 16% since mid-June. Its current results don’t call for any immediate re-rating. Worries could be from the health of rural demand. The monsoon has faltered in July but isn’t as bad as some feared. If urban demand growth accelerates, that could be a mitigating factor. Commodity prices don’t show any signs of reversing, which is a positive factor.
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