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Decent quarter update not enough for Dabur shares to bounce back

Photo: Mint
Photo: Mint

Summary

Dabur has significant exposure to rural markets, thus an improvement in demand here is critical for the company.

Dabur India Ltd’s update for the three months ended June (Q1FY24) is encouraging but that has not aided sentiment for the stock, which fell by more than 3% on Friday.

“Dabur’s commentary seems to indicate a decent performance in Q1 and nothing exceptional," Alok Shah, an analyst at Ambit Capital, said. Dabur expects consolidated business including the recently acquired Badshah Masala to clock more than 10% growth. “Excluding the Badshah Masala acquisition and the international business, Dabur’s revenue growth is likely to be lower than some of its FMCG peers such as Godrej Consumer Products (GCPL) and Britannia Industries," he said.

 

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Graphic: Mint

Dabur has significant exposure to rural markets, thus an improvement in demand here is critical for the company. In Q1, Dabur noted signs of improvement in both rural and urban India backed by moderation in inflation. Interestingly, Marico and GCPL said demand was stable.

Still, the pace of recovery is likely to be gradual at best. In Q1, Dabur’s healthcare and home & personal care segments are likely to see double-digit growth in revenue led by mid-single digit volume growth. However, relatively low margin food & beverage segment bore the brunt of erratic rain and a weaker summer season. But this could provide a cushion to margin. Overall, Dabur’s India business revenue is likely to grow in high single digits. Compare this with a year-on-year growth of just about 5% in Q4FY23.

Coming to profitability, Dabur expects to see year-on-year expansion in its consolidated gross margin from 45.9% in Q1FY23. This could also mark the first expansion in gross margin after many quarters of contraction. Lower commodity costs have played a role in likely margin expansion. One should also factor in the potential accretion to margin from the Badshah acquisition.

Dabur is investing a significant portion of gross margin expansion in advertising and promotion spends. So, it would be worth tracking if Dabur’s plan to increase advertising and promotion spends bears fruit. Nomura Financial Advisory and Securities (India) analysts said Dabur’s strategy to invest back gross profit margin expansion in brand building is a step in the right direction and will aid in securing growth that is better than peers. A rise in investor sentim-ent rests on the strategy working out.

Dabur shares have inched up by only 2% this year so far, underperfor-ming Nifty FMCG index’s nearly 20% gain. The stock trades at nearly 51 times its FY24 estimated earnings, showed Bloomberg data. This is not exactly cheap.

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