Margin expansion still saved the quarter
Dabur's revenue growth of ~1% YoY was at a multi-year low; volume
growth of 4% was bolstered by promotions which weighed on realisation
growth. Gross margins continued to move up and a planned cut on A&P
spends helped operating margins and allowed Dabur to report 12%
growth in earnings, just in line with estimates. Near-term outlook was
cautious. We cut FY17-18CL EPS estimates by 3-4% and cut our rating to
O-PF (from BUY), maintaining target of Rs325. Pick-up in revenue growth
and implementation of GST would be key triggers to watch out for.
1Q results sharply below estimates
Dabur's 1Q Ebitda grew 9% YoY which was 2% below our estimates. This was
despite a big miss on revenues, as margins saved the day. Interest was
slightly higher but was offset by lower tax rates. Overall net earnings were up
12% YoY to Rs2.9bn which were almost in line with estimates.
Weak volume growth coupled with realisation decline
Dabur's volume growth moderated to 4% YoY which was a disappointment.
Overall revenue growth was just 1% YoY, implying a 3ppt decline in
realisation due to increase in promotions to generate demand. Except for
homecare, oral and foods, revenues declined in health supplements (-1%),
digestives (-6%), hair care (-3.5%) and skin care (-3%). Management also
blamed this on disruption in wholesale/retail during June due to PAN card–
related issues on purchases of >Rs200k.
Margin gains helped
Despite heightened promotions, gross margins expanded 1.1ppt to 51.3%
which was a positive, as input costs remained benign. It, however, reduced
A&P spends by 13% YoY to 10.2% which was a surprise but understandable
in the context of higher promotions. Overall Ebitda margins expanded 130bp
YoY to 17.9% which was again a positive and allowed Dabur to almost meet
our estimates. Going ahead, management expects to raise A&P spends which
could be a threat to margin if demand environment does not improve.
Cut to O-PF after a 13% stock price rally in the past three months
Management commentary was fairly cautious, as macro remains challenging
though there are hopes of a recovery during 2HFY17. Despite expected rise in
A&P spends, Dabur is confident of maintaining current margins. We cut our
FY17-18 EPS estimates by 3-4% and downgrade to O-PF (from BUY) after a
13% stock price rally in the past three months. Pick-up in revenue growth
and implementation of GST would be key triggers to watch out for.
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