Markets
Dabur India: Is the worst behind after a miserable September quarter?
Summary
- Dabur India's Q2 slump, driven by inventory corrections and demand volatility, suggests challenges may be easing. With rural demand poised to recover, analysts see potential upside, though investors await stronger growth signals ahead.
It was a foregone conclusion that Dabur India Ltd’s September quarter (Q2FY25) results would disappoint, as the company’s business update earlier this month had already cautioned of a weak quarter. Unsurprisingly, Dabur’s shares reacted with only a muted response.
Read this | Dabur's September-quarter update pours cold water on market hopes
Consolidated revenue was down 5.5% year-on-year to ₹3,029 crore in Q2 due to inventory correction and seasonality factors. Over the past few quarters, organized channels such as E-commerce, quick commerce have been growing rapidly leading to a rise in inventory levels in the general trade (GT) channel. Thus, Dabur took a strategic call to rationalize inventory in the GT channel to enhance channel partners’ return on investment. This hurt primary sales in the India business.
Management commentary based on secondary sales indicated a 2.3% growth in India business, largely weighed down by an 11% year-on-year drop in juice sales. “The Juices category was impacted by extreme weather (heavy rains) and high food inflation leading to less preference for high-ticket/discretionary items, which we believe benefited low-ticket imperfect substitutes such as carbonated drinks," wrote Mihir P. Shah, analyst at Nomura Financial Advisory and Securities (India) in a report on 31 October.
In the domestic market, Dabur’s home & personal care (HPC) and healthcare businesses saw secondary sales growth of 6% and 4%, respectively. Within HPC, Dabur's oral care segment grew by 5%, trailing peers Colgate and Hindustan Unilever Ltd.
The weak primary sales took a toll on profitability. Sure, total raw material costs fell at a sharper rate than revenue growth, aiding year-on-year gross margin expansion of 100 basis points (bps). One basis point is one-hundredth of a percentage point. However, higher operating expenses such as staff costs and other expenses, played spoilsport. Consequently, earnings before interest, tax, depreciation and amortization (Ebitda) fell 16% on-year to ₹552 crore and margin contracted 238 bps on-year to 18.2%.
More here | Private consumption returns, boosted by rural demand
Some analysts have cut their earnings estimates for FY25 and FY26 to factor in the company’s Q2 earnings. Nonetheless, the outlook for the second half of FY25 is encouraging. Inventory correction is out of the way now. Plus, the company would be a key beneficiary of improving rural demand in the coming quarters. The slowdown in urban demand is expected to have bottomed out. Dabur’s management expects the company to clock mid-to-high single digit revenue growth with flattish margins in H2FY25.
Shah of Nomura believes the worst is behind Dabur and the risk-reward is favourable now. As things stand, Dabur’s shares are down almost 20% from their 52-week high of ₹672 apiece seen on 17 September on the National Stock Exchange. Sure, to that extent, valuations have become appealing.
Also read | Festive season spurs consumer spending in smaller towns
Jefferies India’s analysts have retained their ‘buy’ rating on Dabur stock citing that the valuation is comparable to peers at 43x one-year forward price-to-earnings multiple. Although the stock may remain range-bound until growth picks-up, said the analysts in a report on 30 October. Simply put, while valuations may now offer comfort, investors will wait for Dabur’s growth trajectory to improve before allocating brownie points.
