Dabur’s shares slump on weak Q3; recovery to be gradual
1 min read . Updated: 03 Feb 2023, 12:05 PM IST
PremiumInvestors would do well to track margin trajectory. Dabur expects inflation to moderate to 5.5%, which would aid in gradual margin recovery. The company expects another two quarters of pain before gross margin recovers significantly.
Dabur India Ltd’s weak December quarter (Q3FY23) performance has prompted some analysts to cut earnings estimates for FY23-25. Understandably, shares of the fast-moving consumer goods company on the National Stock Exchange were down more than 4% in morning deals on Friday.
Dabur’s significant exposure to rural markets is a key concern given the sluggish economy. The company has observed downtrading by rural consumers, it said in the earnings call. Dabur saw green shoots of revival in rural demand in December but the recovery is likely to be gradual at best.
Q3 volumes in India declined 3% year-on-year (y-o-y). Analysts at Jefferies India said that this was the first decline in nearly three years. Besides muted rural demand, a delayed winter also weighed on volumes. As such, Q3 operating revenue grew 3.5% y-o-y to ₹3,043 crore and the three-year revenue compound annual growth rate stood at 9%.
Margins also took a hit because of elevated commodity costs. Inflation in Q3 was at 8.5%, according to the company, and against this Dabur undertook price increases of only 6.5%.
As such, Q3 gross margin fell 283 basis points (bps) y-o-y to 45.5%. One basis point is 0.01%. The fall in Ebitda (earnings before interest, tax, depreciation and amortization) margin was lower at 129bps, helped bya decline in advertisement expenses. This measure is expected to stay at levels similar to Q3 at 20%, going ahead.
Investors would do well to track margin trajectory. Dabur expects inflation to moderate to 5.5%, which would aid in gradual margin recovery. The company expects another two quarters of pain before gross margin recovers significantly.
Further, the y-o-y growth for the healthcare vertical would look decent after Q4 as the covid base wanes. The food and beverages segment would be strengthened with the consolidation of Badshah Masala Pvt. Ltd acquisition from Q4 onwards.
“We like the (1) continued thrust on innovation, agility and culture change, (2) utilisation of e-commerce platform to drive new product development (premiumisation), and (3) distribution expansion and increased investment behind power brands to drive growth," said analysts at ICICI Securities in a report on 3 February.
Dabur’s shares are down 13% from their 52-week highs of ₹610.75 seen in December. The stock trades at 42 times its FY24 estimated earnings, according to Bloomberg data. A meaningful pick-up in rural demand would boost investor sentiment, but the company’s inability to meet margin guidance could dampen spirits.
