Dabur’s fortunes tied to rural recovery

Ltd put up a dismal show on the bourses in 2023, falling by about 1% at a time when the sector index, Nifty FMCG, gained as much as 29%. A big worry for the fast moving consumer goods company has been subdued volume performance in the previous few quarters. Sure, last week’s business update for the December quarter (Q3FY24) offers comfort, but only slightly.

Dabur said it saw sequential improvement in demand although growth in rural areas has lagged that in urban markets. Still, early signs of a revival in consumption would help volume growth inch up. “Unlike most consumer companies, Dabur witnessed a pick up in rural demand, which should bode well in the coming quarters given its higher saliency in rural markets," said Nomura Financial Advisory and Securities (India) in a report on 4 January.

Analysts estimate rural markets to account for 45 50% of Dabur’s revenue. Ltd’s Q3 update last week also pointed to similar demand trends in the FMCG sector on a sequential basis. Nomura expects Dabur’s domestic volume to have grown by 4% year on year in Q3. In Q2, volume growth was 3%. In view of subdued pricing trends, revenue growth would be volume led.

Dabur’s food and beverage segment is expected to grow in high single digit, while the home and personal care business is likely to clock growth in mid single digit. The delay in the onset of winter chills, however, would likely hurt Dabur’s healthcare business, which is expected to grow in low to mid single digit.

Dabur’s international business continued with its robust momentum of double digit growth in constant currency terms in Q3. Overall, the company expects consolidated revenue growth for the third quarter in mid to high single digit. In short, not very different from Q2, when revenue grew by about 7% to 3,204 crore.

Coming to profitability, Dabur’s gross margin is set to expand for the third time in a row in Q3 led by moderating inflation and cost saving measures. These gains, however, would not reflect at the Ebitda level given the company’s continued efforts to step up spending on advertising and promotions.

For perspective, advertising and promotional expenses as a percentage of revenue stood at 6.8% in Q2, up from 5.1% in Q2FY23. Investors will be watching whether such marketing expenses lead to volume growth in the upcoming quarters, especially amid intensifying competition. It goes without saying that a sustained recovery in rural demand is the need of the hour for Dabur.

Further, “Given the revival in new product launches by Dabur, success of such new products would aid investor sentiment," said Ajay Thakur, an analyst at Anand Rathi Institutional Equities. The Dabur stock trades at nearly 45 times its FY25 estimated earnings, according to Bloomberg data. “In comparison to the 5 year historical average, the valuation is broadly in line or slightly lower," says Thakur.

It appears that investors are factoring in near term demand woes adequately..