Dabur India: Operating margin may run into stress points
By The Moneycontrol
Higher dependency on rural markets has impacted Dabur India performance. Any pick-up in activity will lead to higher growth rate
Dabur India | CMP: Rs 552.90 | The scrip shed over 3 percent.
The FMCG firm in its business update said that the India business is expected to report low to mid-single digit revenue growth.
Healthcare portfolio returned to positive growth trajectory while demand trends for the industry remained weak during Q3FY23.
Gross margin will be marginally better sequentially and rural markets showed early signs of recovery towards the end of the quarter.
Highlights
- Rural markets showing early signs of recovery
- Low- to single-digit revenue growth for India business
- Operating margins will be under pressure
- Investors with a long-term view can accumulate and add on declines
The quarterly update for Dabur India (DIL; CMP: Rs 553; Market capitalisation: Rs 97,978 crore) shows that rural markets exh
The healthcare portfolio returned to the growth trajectory after declining 3 percent in the December 2021 quarter and 7 percent in the September 2022 quarter.
In terms of trade channels, both modern trade and e-commerce continued to report double-digit growth rate.
The healthcare portfolio has witnessed two consecutive quarters of decline in June and September 2022 as the high base of COVID- related demand waned off.
Food and beverages saw some moderation on account of early festive demand, compared to last year.
ibited some early signs of recovery towards the end of December.
DIL expects that rural markets will continue to improve on the back of the upcoming harvest season, higher MSP (minimum support price) and expected spending by the government.
The India business (75 percent of revenues) is expected to report low to mid single- digit revenue growth for the December 2022 quarter, compared to the 7 percent growth in the December 2021 quarter.
The healthcare portfolio returned to the growth trajectory after declining 3 percent in the December 2021 quarter and 7 percent in the September 2022 quarter.
In terms of trade channels, both modern trade and e-commerce continued to report double-digit growth rate.
The healthcare portfolio has witnessed two consecutive quarters of decline in June and September 2022 as the high base of COVID- related demand waned off.
Food and beverages saw some moderation on account of early festive demand, compared to last year
For the June 2022 and September 2022 quarters, the food and beverages segment grew 50 percent and 30 percent, respectively, year on year (YoY).
DIL saw a double-digit CAGR (compounded annual growth rate) in H1FY23.
The 3-year CAGR growth for the December 2022 quarter will be in high single digit for the home and personal care portfolio and in double digits for food and beverages.
The international business is expected to post double-digit revenue growth in constant currency terms in the December 2022 quarter compared to 9 percent in the December 2021 quarter and 12 percent in the September 2022 quarter.
Due to the currency headwinds in Turkey and Egypt, the reported growth in rupee would be affected for international business.
On a consolidated basis, revenue growth is expected to be low to mid-single digit in the December 2022 quarter compared to 8 percent in the December 2021 quarter and 6 percent in the September 2022 quarter.
Gross margins will be marginally better compared to the 45 percent gross margin reported in the September 2022 quarter as inflation has started to cool off during the December 2022 quarter.
Operating margins are expected to be in the range of 18.8-19.3 percent for the December 2022 quarter, compared to 21.3 percent for the December 2021 quarter.
The lower operating margin is mainly due to inflation and the currency movement in international business.
DIL recently acquired 51 percent stake in Badshah Masala.
This was announced after the September 2022 quarter result.
Now, entering a larger addressable market size, DIL will continue to invest in its power brands, innovation, distribution expansion and a strong backend, which will enable it to improve its market share and achieve sustainable growth.
Based on our projection, DIL is currently trading at a P/E multiple of 44x FY24E earnings.
Investors with a long-term view can accumulate the stock at the current levels and add on declines.
