Fast-moving consumer goods companies Marico Ltd, Godrej Consumer Products Ltd and Dabur India Ltd have released their pre-quarter update for the three months ended March 31 (Q4FY23). Marico and Godrej shares are flat after the business update. Dabur shares, however, fell 4% on Thursday as the update lagged investor expectations and margin was a significant disappointment. Overall, the update paves the way for an earnings cut for FY23.
Analysts were looking at an expansion in Dabur’s EBITDA margin year-on-year. Instead, the measure is likely to fall by 200-250 basis points (bps), according to the company. Note that the Ebitda margin for the same period last year was 18%.
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The weak margin performance comes even as commodity inflation has largely calmed down. This is mainly due to two factors. One, currency headwinds in Dabur’s international business are hurting gross margins. Second, Dabur increased advertising spend in the fourth quarter, leading to a decline in Ebitda margin. For the first three quarters of FY23, Dabur’s Ebitda margin declined by 130-190 bps year-on-year.
To be sure, while Dabur’s international business is relatively small, the bigger concern is sluggish demand in rural India. Both Dabur and Marico underlined weak rural sentiments in their respective updates for the March quarter. Improving demand in rural India will be important for Dabur, as it derives a major chunk of its revenue from these regions. In its India business, Dabur is expected to post mid-single digit revenue growth. Its food and beverage business and healthcare portfolio are in a strong position. However, the personal care category will be impacted by the slowdown in demand.
Volume growth is likely to disappoint. For perspective, Dabur’s India business saw a 3% decline in volumes in the third quarter, while revenue grew by around 3%. This compares to an estimate of 8% for Kotak Institutional Equities.
Going forward, there is a silver lining as Dabur sees some positives such as lower inflation, improving consumer confidence and higher government spending. Separately, Q4 will also see the consolidation of the Badshah spice business. As such, key triggers for Dabur stock include revival in rural demand, better-than-expected volume growth and margin improvement. Dabur shares have declined 6% so far this calendar year. According to Bloomberg data, the stock is trading at around 43 times FY24 estimated earnings. If rural demand recovery is slow, valuations may fall.
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