Dabur: Margins to come off as firm pushes growth

GST would be key to India volume sales growth even as demand improves after note ban blues

Dabur India's consolidated March quarter results were a bit disappointing, even as it had a few surprises for investors.

On the positive side, Dabur sustained market share gains for the second quarter in a row across its key categories such as oral care, hair oils, juices and home care, even as competitive intensity remained high. The company even managed to recover some market share lost to Patanjali in the honey segment. Secondly, as compared to analysts' expectation of a contraction, operating profit margin's healthy expansion was aided to some extent by falling advertisement spends (as a percentage of sales), employee costs as well as other expenses. As a result, the company's operating profit margin came in at 21.9 per cent, highest over the past seven to eight quarters.

That's where the good news ends. The 2.4 per cent domestic sales volume growth was a disappointment. While it comes on a high base of seven per cent in March 2016 quarter and was better than the decline of five per cent in previous quarter, indicating that much of the demonetisation pain is behind the firm, the number was lower than analysts' expectations of four to five per cent increase. Among categories, even as hair oils grew well on the back of strong growth in almond, sarson amla, brahmi amla, and others, shampoos continued to take some heat. In fact, Dabur is looking to revamp its flagship Vatika portfolio towards the Ayurveda platform. International business (a fourth of consolidated revenues) also remained weak on the back of currency devaluation in Egyptian pound, lira, and others, as well as due to macroeconomic headwinds in Saudi Arabia and the UAE.

So, even as operating profit margin came better than expected and higher other income coupled with savings in interest costs helped Dabur post a net profit of ~333 crore (up 0.5 per cent year over year), it was below Bloomberg estimate of ~337 crore. The weaker sales volume number and adverse currency movements also meant that net sales at ~1,909 crore, down 4.8 per cent year on year, were also lower than expectation of ~2,025 crore.

Dabur is working to ramp up sales volumes, and is targeting domestic sales volume growth of 5-10 per cent. But, that may not be easy given the demand environment and will come at a cost. Dabur is stepping up advertisement spends, and believes operating profit margin could trend down a bit. A key monitorable would be implementation of goods and services tax (GST) in July. While the company is well prepared to comply with and implement GST, management indicated that the various distribution channels such as wholesalers, retailers seem to be under-prepared for GST. This means the company could witness some pressure on domestic sales volume growth, particularly in the first half of this financial year.

At current levels, the Dabur stock trades at 35 times one-year forward estimated earnings which is higher than its historic average of 32.1 times and seems to bake in the positives adequately.

Dabur is working to ramp up sales volumes, and has set a domestic sales target growth of 5-10 per cent