Challenges and Opportunities for Dabur India Ltd in Recent Quarter
Dabur India Ltd, a major player in the ayurveda-based consumer goods sector, faced significant challenges during the just-concluded September quarter. Although there were signs of demand improvement, persistent adverse weather conditions, particularly heavy rains and floods, severely impacted out-of-home consumption, notably in the beverages sector. This led to a notable decline in Dabur’s stock, which fell by nearly 7% in afternoon trading amidst a broader market downturn.
Inventory Build-Up and Revenue Realignment
The weak demand has caused a concerning inventory build-up in Dabur’s general trade channels, which represent a significant portion of the company’s sales. The rapid growth in e-commerce and quick-commerce sales has exacerbated the situation, negatively affecting distributors’ return on investment. In response, Dabur is taking steps to realign distributor inventories within its general trade channel. However, this initiative may lead to a temporary decline in revenue, as the company anticipates a mid-single-digit drop in consolidated revenue for the second quarter (July-September).
Financial Projections and Earnings Outlook
According to Nuvama Research, Dabur is expected to report a year-on-year revenue decline of 5% and a 15% drop in EBITDA for the September quarter. This follows a first quarter where Dabur’s consolidated revenue increased by 7% and EBITDA rose by 8.3% compared to the previous year. Furthermore, Nuvama predicts a high-single-digit year-on-year decline in domestic volumes for Dabur, a challenge common among fast-moving consumer goods (FMCG) companies but one that came as a surprise to market analysts.
Impact on Operating Margin
Given the decrease in primary sales, Dabur has indicated that its operating margin is likely to fall into the mid-to-high teens for the second quarter, largely due to increased investment and deleveraging efforts that may affect profitability. Despite these economic pressures, analysts from Jefferies India suggest that Dabur’s commitment to maintaining marketing expenditures indicates that efficient margin management will remain a challenge in the foreseeable future.
Positive Performances and Future Outlook
On a more positive note, Dabur’s international business is projected to deliver double-digit revenue growth in constant currency terms. Additionally, its Badshah Masala business has shown robust performance, with double-digit growth reported for the September quarter, providing a silver lining amidst domestic challenges. The management team at Dabur expresses optimism about improved business performance in the upcoming third quarter, with plans to continue investments in distribution infrastructure. They aim to foster revenue growth starting in October, supported by momentum in alternative sales channels.
Market Performance and Competitor Landscape
Despite these hopeful signs, the stock performance of Dabur may still be hindered. Year-to-date, Dabur’s stock has only seen a modest increase of 5%, significantly trailing behind the Nifty FMCG index, which has appreciated by 13%. Analysts warn that potential challenges could weigh on earnings, causing continued pressure on the stock price. Systematix Shares and Stocks (India) recently highlighted that 35-40% of Dabur’s portfolio is facing near-term growth obstacles. Additionally, intense pricing competition, particularly in the cola segment, poses further threats to the company’s market share.
Valuation Considerations and Earnings Estimates
In light of the ongoing challenges and recent developments, it’s not surprising to see some brokerage firms downgrade their earnings estimates for FY25 and FY26. Dabur’s valuation might appear high, trading at approximately 44 times its FY26 price-to-earnings ratio according to Bloomberg data. Achieving meaningful re-rating of the stock will heavily rely on consistent growth in earnings.
Conclusion
In conclusion, while Dabur India Ltd faces several headwinds in the near future, the potential for growth, particularly in international markets and specific product lines, may present opportunities for recovery. Maintaining vigilance on competition and market dynamics will be crucial as the company navigates through these turbulent times.
