Dabur India Ltd’s weak December quarter (Q3FY23) performance has prompted some analysts to cut earnings estimates for FY23-25. Naturally, shares of the fast-moving consumer goods company were down more than 4% in morning deals on Friday on the National Stock Exchange.
Dabur’s significant investment in rural markets is a major concern given the sluggish economy. In the earnings call, it said that the company has seen downtrading by rural consumers. Dabur flagged a revival in rural demand in December, but the recovery is likely to be gradual.
Q3 volumes in India declined by 3% year-on-year (yoy). Analysts at Jefferies India said this was the first decline in nearly three years. Apart from sluggish rural demand, delayed winter also affected the business. Thus, Q3 operating revenue increased by 3.5% 3,043 crore and a three-year revenue compounded annual growth rate of 9%.
Margins were also impacted due to higher commodity prices. According to the company, inflation in the third quarter was 8.5%, against which Dabur increased prices by only 6.5%.
Thus, Q3 gross margin fell 283 basis points (bps) to 45.5%. One basis point is 0.01%. The decline in Ebitda (earnings before interest, tax, depreciation and amortization) margin was lower at 129 bps, helped by a decline in advertising expenses. Going forward this measure is expected to remain at the same level as Q3 at 20%.
Investors would do well to track the margin trajectory. Dabur expects inflation to come down to 5.5%, which will help in gradual margin recovery. The company expects two quarters of pain before gross margin improves significantly.
Moreover, the year-on-year growth for the healthcare vertical will look decent after Q4 as the Covid base wanes. The food and beverages segment will be strengthened with the consolidation of Badshah Masala Pvt. Ltd. Acquisition from Q4 onwards.
“We prefer to (1) emphasize innovation, agility, and culture change, (2) use e-commerce platforms to drive new product development (premiumization), and (3) drive distribution expansion and growth The rise in investment on the back of power brands, analysts at ICICI Securities said in a report on February 3.
Dabur shares down 13% from their 52-week high December saw 610.75. According to Bloomberg data, the stock is trading at 42 times FY24 estimated earnings. A meaningful uptick in rural demand will boost investor sentiment, but the company’s inability to meet margin guidance could dampen enthusiasm.
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