Markets
Dabur India’s margin bounces back in Q1, but road ahead is long
Summary
Dabur India Ltd's Q1FY24 results showed a small increase in Ebitda margin, but investors were unimpressed due to a sharp rise in A&P expenses. The company expects sequential gross margin improvement, but plans to reinvest gains into A&P spends.
In the March quarter, Dabur India Ltd’s Ebitda margin had grabbed more attention as it had fallen to a multi-quarter low. With pre-quarter update for three months ended June (Q1FY24) suggesting decent recovery in revenue, margin performance was a monitorable when results were announced.
Consolidated Ebitda margin did improve in Q1, but the quantum of increase is rather small at six basis points (bps) year-on-year to 19.3%. Note that this increase comes after margin has declined consistently for past five quarters. Investors are not impressed, with Dabur’s shares closing almost 2% lower on Thursday. One reason that curtailed Ebitda margin expansion in Q1 is the sharp 30% jump in advertisement and publicity (A&P) expenses. A&P expenses as a percentage of revenue rose by 96 bps to 6.5%. For perspective, gross margin expansion was higher at 74 bps. The outlook for gross margin is encouraging. Dabur’s management expects sequential gross margin improvement for next two to three quarters. However, the company plans to plough back gross margin gains into A&P spends, thus Ebitda margin exp-ansion may not be significant. Of course, much depends on the inflation trajectory in India. In international markets, currency devaluation would play a role in how margin shapes up. For now, Ebitda margin guidance for FY24 is 19-20%. In FY23, Ebitda margin was 18.8%.
Meanwhile, it is encouraging that rural market is picking up. The company said rural growth has bounced back to high single-digits after three quarters. However, rural growth continues to lag urban demand, but the gap has reduced quite a bit.
Dabur has seen market share gains across 90% of its portfolio. In hair oils category, it touched the highest-ever share of 17.4%.
To be sure, Dabur disappointed on the volume front, clocking just 3% growth in the India business. It expects an improvement ahead. Poor performance of the beverages segment owing to unseasonal rains weighed on the company’s volume. The company says that excluding food and beverages, volume growth was 6% in Q1.
So far in 2023, Dabur’s shares have fallen by 1%, underperforming the Nifty FMCG index, which has gained almost 18%, driven by the outperformance of ITC Ltd. According to Bloo-mberg, Dabur’s shares trade at nearly 43 times FY25 estimated earnings. The company’s posit-ive commentary on rural dem-and augurs well given its large presence in the market. Further, it remains to be seen if A&P spends would translate into better volume growth vis-à-vis peers.
