Dabur is expected to bear the brunt of the lingering rural slowdown in H1FY23. Margin concerns also persist
Dabur India Ltd’s shares were down by 5% in the past two trading days on the NSE amid the broader market weakness and the subdued results for the fourth quarter of financial year 2022 (Q4FY22).
The company’s Q4 consolidated Ebitda (earnings before interest, taxes, depreciation and amortization) fell short of analysts’ expectations. Higher costs meant just 2.5% year-on-year (y-o-y) growth in Ebitda to ₹453 crore with the margin contracting by 92 basis points (bps) to 18%. One basis point is 0.01%.
This is when revenues have increased at a comparatively faster pace of 7.8% to nearly ₹2,518 crore.
Dabur’s domestic food and beverages business saw robust growth in Q4 whereas healthcare was resilient; and home and personal care was lacklustre. Overall, analysts estimate India’s fast-moving consumer goods (FMCG) business volume growth at around 2%. Domestic revenue growth was 8%. On a three-year CAGR (compound annual growth rate) basis, growth has tapered sequentially.
“We note that Dabur’s three-year revenue CAGR in the domestic business decelerated to 5% in Q4FY22 from 10% in Q4FY22," said analysts from Kotak Institutional Equities in a report on 6 May. Recall that Q4FY20 operations were impacted by the covid outbreak and that’s why a three-year CAGR enables better comparison.
One factor that weighed on Dabur’s revenue growth in Q4 is the slowdown in the rural market owing to liquidity constraints and lower consumer spends. The company’s management has called out down trading in hair oils and shampoos.
As such, FY23 has begun on a dull note. Dabur is expected to bear the brunt of the lingering rural slowdown for the first half of financial year 2023 (H1FY23). Plus, margin concerns persist, although there could be some respite on this front as Dabur is considered relatively better placed versus peers. Dabur faces lower gross margin pressure relative to most peers because of its portfolio mix but higher demand pressure owing to higher rural salience (45-48% of overall sales), analysts from Kotak pointed out.
HDFC Securities’ analysts do not expect a material impact on Ebitda margin in FY23 (high base of other expenses and cut-down in A&P to support). In FY22, Dabur’s Ebitda margin fell by 25bps in FY22 to 20.7%. The company hopes demand conditions would be better in H2FY23 helped by good monsoons, which could lead to better rural demand.
Meanwhile, according to Bloomberg data, Dabur’s shares trade at almost 44 times estimated earnings for FY23. Concerns on demand and margin pressures may well limit scope for expansion in the stock’s valuations in the near future.