Weak rural demand to delay Dabur's recovery

Dabur India has been the worst performer in the fast-moving consumer goods (FMCG) space this year (CY23), posting a 1 per cent decline even as its peer index, the Nifty FMCG, has delivered returns of over 29 per cent in this period.

Its performance over the last few quarters has been impacted by a slowdown in rural markets, which account for about half its revenues, resulting in lower volumes.

The slowdown in consumption was on account of higher food inflation, which impacted the home and personal care segment.

While unseasonal rains hit the demand for juices, growth in the healthcare vertical moderated.

Currency headwinds impacted its international business, which accounted for a quarter of consolidated revenues.

This coupled with delay in margin recovery led to brokerages cutting their earnings estimates over the last few quarters.

Dabur posted 3 per cent organic volume growth (5.8 per cent overall) in the September quarter.

The sub-par volume growth, according to IIFL Research, was on account of rural demand being subdued due to inflationary pressure and uneven distribution of rainfall.

However, with increases in minimum support prices, investment in rural infrastructure, a robust crop sowing season and the coming festive season, the rural demand sentiment is expected to improve in the second half of FY24, says the brokerage.

While IIFL Research cut its earnings estimates post the September quarter results, it expects a gradual improvement in the demand environment.

It expects Dabur to be a key beneficiary of the improvement in the rural sentiment.

IIFL Research has a buy rating with a price target of Rs 600.

The recovery, however, could be delayed as it is yet to reflect in the demand trends for the December quarter.

Say analysts led by Abneesh Roy of Nuvama Research, “We reckon volumes of most staples companies shall stay muted in Q3FY24, especially in rural India.

"Even for Dabur we expect low single digit volume growth in Q3FY24 (3 per cent y-o-y in Q2).”

With delayed winters, Chyawanprash sales could be muted while the beverages portfolio is likely to see recovery (versus 10 per cent Y-o-Y dip in Q2).

The brokerage expects home care and over the counter products to do well while skincare should post reasonable growth.

Home and personal care accounts for about half of Dabur’s sales, healthcare contributes 30 per cent while food/beverages accounts for the rest.

Nuvama Research has maintained its buy rating with a target price of Rs 680.

While there are growth headwinds, profitability should look up due to easing input prices.

Lower inflation led to a gross margin expansion of 295 basis points in the September quarter.

The trend should continue in the December quarter.

However, the gains at the operating level would depend on advertising spends.

Despite the sharp uptick in gross margins, the expansion at the operating level was limited to 50 basis points given a 42 per cent jump in advertising costs.