Dabur: Lower raw material costs, new product launches to boost growth

After 14 per cent average volume growth in the first three quarters of FY19, Dabur is expected to maintain its volume outperformance vis-à-vis peers. 

In addition to volume growth, margin gains on the back of lower raw material costs should help it post strong revenue and net profit growth, going ahead. 

The company, which posted results in line with expectations in the December quarter, is trading at 44 times its FY20 earnings, which is at a 16 per cent discount to larger peer Hindustan Unilever. 

While volume growth has varied from 7-21 per cent over the last six quarters, analysts at J.P. Morgan expect Dabur to report 8-10 per cent volume expansion in FY20, aided by better rural growth and accelerated pace of new launches. 

One of the key triggers for the company is an expected uptick in rural consumption, given the incentives for the rural economy proposed by the government in the interim Budget. Dabur earns over 45 per cent revenues from rural pockets. Even in Q3, the firm’s rural pockets grew 400 basis points faster than its urban segments.

Besides new launches in the food category, Dabur is set to unveil ayurveda-based products in oral care, hair care and health categories. The company’s herbal category could benefit from the receding competitive intensity in the herbal market, say analysts. 

For instance, in Q3, the company reported healthy double-digit growth in Chyawanprash (10 per cent year-on-year) and Dabur Honey (around 20 per cent YoY), which had lost ground after the debut of Patanjali in the consumer space. 

Besides gaining on the top line front, the company will also benefit from benign raw material costs. 

The management is confident about sequential improvement in gross profit margin in the coming quarters. This, coupled with operating leverage amid lower advertising spends, should fuel the company’s operating profit margin. 

Even with lower selling and administrative expenses, Dabur’s Ebitda margin stood at 20.3 per cent, just 27 basis point down YoY, versus a 228-basis-point YoY fall in gross profit margin. 

Analysts foresee 14-15 per cent annual growth in Dabur’s net profit over the FY18-21 period. 

What needs to be watched, however, is the progress of the company’s international business (25 per cent of revenues), which is facing strain due to demand pressures.

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