Dabur India: Covid effect ebbing affects sales

13 Jul 2023 , 10:32 AM

Recommendation: Buy; Target price: Rs. 640

Dabur’s sales growth in FY23 was muted driven by macroeconomic headwinds such as high raw material inflation, currency depreciation impacting both the domestic and international business and high base of Covid. Foods and Homecare segments clocked double-digit growth while Health supplements saw double-digit decline. The company expects to clock 8-10% organic sales growth in the medium term driven by aggressive distribution efforts and increased ad-spends with moderation in raw material prices. Maintain BUY with a TP of Rs.640.

Wide divergence in performance within segments: 

The domestic business grew 6.2% (5.5% excl. exports) driven by Foods, Home care and Digestives segments clocking double-digit growth. On the other hand, Health supplements business declined in double-digits on a high Covid base of FY22. International business growth was lower at 2.2% due to macroeconomic headwinds, especially in MENA and Bangladesh markets. Unprecedented inflation led to contraction in Ebitda margin by ~190bps resulting in 4% decline in Ebitda in FY23.

Initiatives to drive growth: 

Dabur has acquired 51% stake in Badshah Masala for a purchase consideration of Rs4.8bn with an intention of garnering Rs5bn revenues from Foods segment in 3 years. With a slew of new products across all the segments and increase in ad-spends, the company is targeting to clock 8-10% organic sales in the medium term. It has been strengthening both direct (1.4mn outlets) and total (7.7mn outlets) reach and investing behind channels of the future – modern trade and e-commerce. The alternate channels like MT, e-com, cash & carry and Institutions contribute to 23.5% of company’s overall business.

FCF generation and return profile: 

Dabur’s FCF generation fell to 47% of net profit in FY23 due to Badshah acquisition, higher organic capex and slight increase in working capital. Net debt increased from Rs3bn in FY22 to Rs6.7bn in FY23. Unprecedented inflation in commodity prices led to 270bps contraction in gross margin and consequently impacting the return profile. ROIC for Dabur declined to 41.5% in FY23 (vs 57.9% in FY22).