(Photo: Ramesh Pathania/Mint)
(Photo: Ramesh Pathania/Mint)

Dabur bucks the trend in Q1, but commentary hints weakness ahead

  • The firm is facing huge competitive intensity and is looking at innovations to counter the slowdown, the management said
  • Even though its rural business grew 13%, the liquidity crunch in the rural sector is getting sharper and could be a pain point for the company in the coming quarters

Fast-moving consumer goods company Dabur Ltd did quite well to bounce back after a fourth-quarter blip. In Q4FY19, Dabur’s volumes had grown at a fair pace of 4.3%. But in Q1, volume growth has been strong at 9.6%. This suggests that Dabur has bucked the general sluggishness that is being seen in other FMCG companies.

But as the saying goes, one swallow does not a summer make. Investors, in fact, didn’t seem all that impressed. Dabur shares fell by about 1% on Friday, after the results were announced.

The management’s commentary on its future volume growth expectations were a dampener. The management said on a call with analysts that it was ‘cautiously optimistic’. “The management has toned down its volume expectations for the full year from high single-digits to 'mid- to high single-digits'. That’s a step down. They also cited slower growth in rural and tight liquidity conditions in the economy," said an analyst at a domestic brokerage.

Of course, none of this is reflected in June quarter numbers. In Q1, Dabur saw revenues increase by 9.3% year on year in the first quarter. Ebitda margins too rose to 20.1%, from 18.6% in the year ago June quarter. Ebitda is earnings before interest, tax, depreciation and amortization.

Growth in the health and personal care segment has been strong at 11.7%, and the healthcare segment’s sales grew 17.8%. In hair oils, it seems the company is benefiting from the tailwinds arising from the shift from unbranded to branded products. Oral, home and skincare have also been growing between 11.4% and 12.1% due to new product launches.

A good thing is that the consolidated material costs have held at about 50.5% in Q1FY20. The management indicated that it has taken a 1.4% price hike on average, although deflationary trends continue.

The rural business grew 13% in the first quarter and may seem quite attractive. However, the liquidity crunch in the rural sector is getting sharper and could be a pain point for the company in the coming quarters. Wholesale contributions too are shrinking. Reaching out directly to rural customers may help counter this, but it will involve costs in setting up a network.

A worry is its foods division. This segment has clocked dismally low single-digit growth of just 1.5%. The beverage and juice portfolio continues to suffer. Competition from milk-based and carbonated beverages has intensified significantly. The management said that it is facing huge competitive intensity, but it has been looking at innovations to counter the slowdown.

A higher price-earnings ratio is no sign of comfort though. With trailing 12-month price-earnings multiple at 51.3 times, the stock remains expensively priced. Any blip in volume growth could unnerve investors.

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