Dabur stock is priced to perfection

“Dabur’s Q2 performance was a beat on our estimates of revenue and Ebitda. Revenue growth was 12% year-on-year (yoy), with a two-year CAGR of 13%. Domestic revenue/volume growth was 12/10% year-on-year with a two-year CAGR of 16/13% versus HUL’s 7/2%, Nestle’s 10/9%, Marico’s 15/9%, Colgate’s 5 /2% and Emami’s. 11/8%,” analysts at HDFC Securities Ltd said in a report. Ebitda is short for earnings before interest, tax, depreciation and amortization.

Management commentary was also upbeat. In a post earnings conference call, the company management said, the rural market registered a growth of 12% as compared to 9% for urban. While rural demand was hit in September due to liquidity issues, Dabur remains positive on the outlook due to good monsoon, good harvest, positive MSP and low unemployment. The company wants to increase its Direct Village coverage from 83,500 at present to 90,000 next year. Its management has maintained double-digit revenue growth guidance for FY12.

As far as input cost inflation is concerned, it is expected to remain elevated in the near future, which will impact gross margins. However, commentary indicated a stable operating margin outlook, led by higher price increases and cost savings from project prosperity. In Q2FY22, gross margin fell 200 basis points (bps), but the decline in operating margin was flat at 60 bps, supported by lower advertising and employee spending. One basis point is one hundredth of a percentage point.

Nonetheless, analysts say the company’s aggressiveness on innovation bodes well for the stock’s long-term performance.

“We have long believed in the reimagining of Dabur under the leadership of Mohit Malhotra. Importantly, it achieved outperformance across the portfolio. It doesn’t matter whether Dabur is a leader in a class or a challenger, its share in most of them is increasing. Also, in our opinion, the focus on power brands after a brief divergence last year (the peak of the crisis) is commendable (given the consensus was concerned). To add to this, the expanded opportunity in foods (beverages) is supporting a stronger print,” analysts at ICICI Securities Ltd said in a report.

But for now, most of this is priced positive, analysts said. The company’s shares are trading at around 55 times the one-year forward price-to-earnings multiple.

On the other hand, there are certain risks that investors of this stock should take note of. Analysts at ICICI Securities Ltd said the downside risk still exists in the healthcare portfolio, the beverages portfolio may find it difficult to sustain the growth momentum and there are fresh concerns over the rural slowdown.