It's a challenging time for FMCG players such as Dabur as they are facing the double-whammy of soaring inflation and slowing rural demand.
Dabur on May 5 reported a 22 percent year-on-year (YoY) decline in consolidated net profit to ₹294.34 crore for the fourth quarter ended March 2022. The company's Q4FY21 net profit was ₹377.29 crore.
Revenue from operations rose 8 percent YoY to ₹2,517.81 crore in Q4FY22 from ₹2,336.79 crore in the same quarter last year.
The company witnessed slow rural demand in the March quarter owing to inflation. As reported by Mint, consumers downgraded to cheaper brands in categories such as toothpaste to hair oil and shampoos as surging inflation chipped away at their spending power.
“We have seen a little setback coming in from rural. For us, in the past couple of quarters, our rural was always firing ahead of urban. However, what we found in this quarter is a liquidity crunch and demand compression in rural India. Therefore, our credit (cycle) has also gone up in rural India. Rural is the one which is not doing so well for us at the moment," Dabur India’s chief executive Mohit Malhotra said.
Shares of the company fell over 3 percent in trade and extended the losses into the third consecutive session. Shares of Dabur closed 3.48 percent lower at ₹510.80 on BSE on May 6.
Brokerage verdict
Brokerage firms point out that Dabur's Q4FY22 result was broadly in line with most parameters, including volume, sales, and gross profit estimates, but higher other expenses led to a miss on EBITDA.
Brokerage firm Motilal Oswal Financial Services, which has a 'buy' call on the stock with a target price of ₹630, said Dabur's sales visibility is better than its peers in the near term and it earnings, too, have better visibility due to higher pricing power against its peers.
"The medium-term and structural narratives on revenue growth are highly attractive, led by the initiatives taken by the new CEO in recent years on power brands, distribution, launches, and better analytics. Consequently, FY23 is likely to be the fourth year out of five of double-digit sales growth. As the impact of investing in these initiatives abates, Dabur’s margin is likely to expand in FY24," said Motilal Oswal.
Brokerage firm ICICI Securities also has a 'buy' call on the stock with a target price of ₹650, citing the company's Q4 performance was decent on an overall basis.
However, ICICI Securities highlighted three major risks for the company: (1) slowdown risk in the healthcare portfolio still exists, (2) sustaining growth momentum in the beverages portfolio may be difficult and (3) there are concerns about rural deceleration.
Nevertheless, the brokerage is positive on the prospects of the company.
"We like the (1) continued thrust on innovation, agility and culture change, (2) utilisation of e-commerce platform to drive new product development (premiumisation), and (3) distribution expansion and increased investment behind power brands to drive growth," said ICICI Securities.
Another brokerage firm YES Securities also has a 'buy' call on the stock with a target price of ₹609. The brokerage said despite the unprecedented inflation, the company was able to maintain margins with aggressive price hikes in all segments other than hair oil and strong cost controls.
"Expansion of addressable market is a key focus area for the company in segments like single herbs, beverages and healthcare. We expect the company to continue delivering industry-leading growth for the next couple of years led by aggressive new product developments, distribution expansion and brand extensions," said YES Securities.
"Margin pressures make us trim our earnings estimates, but due to Dabur’s increased growth aggression, transformation initiatives, strong rural reach expansion strategy amidst an expanding Ayurveda/herbal market and improving international growth outlook, we maintain a 'buy', as valuations also look reasonable now post the recent correction," YES Securities added.
Market sentiment on the stock is ‘neutral’, according to a MintGenie poll and an average of 38 analysts has a ‘buy’ call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies and not of MintGenie.
