Dabur Rating: Buy; Rural demand trends to improve

FMCG giant Dabur India outperformed peers with 9% three-year volume Cagr in our coverage. Gross margin (GM) pressure was visible but managed at Ebitda mainly through lower advertising & promotional (A&P) spend. Dabur announced 51% acquisition of regional spice brand, Badshah eyeing a bigger play in foods (49% in next five years). Management is hopeful on growth & sequential margin in second half. We retain BUY—add Dabur in top-3 BUYs (alongside GCPL & HUL).

In-line Ebitda: The second quarter Ebitda declined 3% y-o-y to Rs 6.0 bn, in-line with estimates. Revenue grew 6% y-o-y, with standalone (+7%) doing better than international (+2%; +12% c/c). Ebitda margin dipped ~190bps y-o-y due to RM headwinds.

Management highlighted share gains in 95% of portfolio: Food and beverage grew +30% while healthcare declined (-7%) as Covid-19 tailwinds waned. Decline was led by health supplements

(-13%) while over-the-counter (OTC) products, ethicals and digestives were flat. Further, three-year Cagr remains steady at 10% (flat q-o-q). Home & personal care (HPC) grew 6% y-o-y, led by Oral care (+9% vs.3% for Colgate) and Home Care (+20%). Hair oils grew 2%, largely similar to Marico’s VAHO.

Ebitda margin: Gross margin declined ~350bps y-o-y to 45.4%, led by RM inflation (~10%) and an adverse mix (high share of foods). This was partly offset by lower ad-spends (-25%), restricting Ebitda margin contraction to ~190bps y-o-y to 20.1% (in-line). Management noted that while ad-spends were lower, there was a commensurate increase in trade promotions.

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M&A: Dabur’s acquisition of 51% stake in ‘Badshah Masala’, a spices brand with presence in Gujarat, Maharashtra and Telangana would entail a cash consideration of Rs 5.9bn, valuing the company at 4.5x revenue and 19.6x Ebitda (FY23e). This adds ~2% to Dabur’s revenue and would be cash EPS accretive.

Management remains hopeful of improving rural demand trends going forward, with festive season seeing good traction and initial inventory stocking for upcoming winters (peak season for healthcare) also being encouraging. Urban demand should remain steady, led by modern trade and e-commerce. On the margin side, inflation should moderate q-o-q to ~6%. This, along with 2-3% product price hikes taken in Q2 should drive q-o-q margin expansion. For the full year, Dabur aims to maintain Ebitda margin in the 20-21% range. We cut our EPS by 2-4% tweaking mainly our margin assumptions. TP remains unchanged at Rs 660.