Market share focus to weigh on Dabur India's near-term profitability

Dabur India’s (Dabur) focus on market share gains at a time when demand is slowing, coupled with last year’s high base, could weigh on its March 2019 quarter (Q4) profitability.

Dabur CFO Lalit Malik says consumer sentiment is a down, and overall consumer demand (rural as well as urban) has slowed down in Q4. There is also marginal inflationary pressure. Thus, protecting operating profit margin could be difficult. This is because the subdued demand situation leaves little room to control promotional spends.

During the December quarter, for instance, while Dabur’s gross profit margin fell sharply by 228 basis points year-on-year to 49.3 per cent, its Ebitda (earnings before interest, tax, depreciation and amortisation) margin contracted by a meagre 27 bps YoY to 20.3 per cent. 

“If demand does not improve, quest to drive top line with market share gains will require sustained promotion, which, along with any raw material inflation, could impact margin, resulting in some earnings moderation,” says Nitin Gupta, analyst at SBICAP Securities, even as he is positive on the stock.

Further, Dabur had witnessed around 24 per cent Eebitda margin in the March-2018 quarter, the highest in since the June 2012 quarter.

These issues, along with some inflationary pressure, could weigh on its operating margin in Q4. While factors such as better product mix could soften the pressure, some analysts see a 65 bps YoY contraction in Dabur’s operating profit margin to 23.2 per cent in Q4.

The good part is that long-term margin levers are still there. Analysts at Edelweiss believe Dabur’s pricing power aided by leadership position in nine portfolio categories (65-70 per cent of its revenue), continued focus on premiumisation and cost efficiency measures should help maintain margin. Ebitda margin is estimated at 21-22 per cent levels and net profit is seen rising 15 per cent YoY over the next two years.

Gupta believes though there could be short-term earnings moderation, Dabur’s long-term growth levers remain intact.

In fact, leadership position and focus on e-commerce should also help gain market share. Despite higher base (around 14 per cent volume growth during April-December 2018), the management expects volumes to grow in mid-to-high single digits in FY20, and says competition from Patanjali is now behind.

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