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Dabur India Ltd, a leading player in the ayurveda-based consumer goods sector, encountered a challenging September quarter, marked by a significant decline in revenue due to adverse weather conditions and an inventory build-up. The company's business update revealed that while demand showed some improvement, heavy rainfall and floods negatively impacted out-of-home consumption, especially for beverages. This led to a nearly 7% dip in Dabur's stock price on Thursday, amidst a broader market downturn.
The weak demand situation resulted in an accumulation of inventory within Dabur's general trade channel, which constitutes the majority of its sales. The disproportionate growth in e-commerce and quick-commerce sales contributed to this inventory build-up, putting pressure on distributors' return on investment. To address this issue, Dabur announced its decision to realign distributor inventories within the general trade channel, inevitably leading to a temporary decline in revenue. The company anticipates a mid-single digit decrease in its consolidated India revenue for the second quarter (July-September).
Independent research firm Nuvama Research estimates that Dabur's consolidated revenue will experience a 5% year-on-year decline in the September quarter, while Ebitda (earnings before interest, tax, depreciation, and amortization) is projected to drop by 15%. This stands in stark contrast to the first quarter's performance, where consolidated revenue rose by 7% and Ebitda increased by 8.3% year-on-year. Nuvama also predicts a high-single digit year-on-year decline in domestic volumes for Dabur. The issue of excessive inventory is a common challenge for fast-moving consumer goods (FMCG) companies, but its impact on Dabur has caught market observers by surprise.
The lower primary sales are expected to negatively affect Dabur's operating margin in the second quarter, with a projected decline in the mid-to-high teens due to increased investment and deleveraging. While acknowledging the substantial pressure, Jefferies India noted that Dabur's commitment to maintaining marketing expenditures suggests that 'margin management' will be a complex endeavor going forward. Despite these challenges, Dabur's international business is anticipated to deliver double-digit revenue growth in constant currency terms. The company's Badshah Masala brand also exhibited robust performance in the September quarter, achieving double-digit growth.
Looking ahead, the Dabur management expresses optimism about improved business performance in the third quarter ending in December. Continued investment in distribution infrastructure is expected to contribute to reviving revenue growth from October onwards, supported by momentum in alternative channels. The company anticipates a recovery in rural demand and stronger winter demand to enhance its revenue mix. However, these positive factors may not be sufficient to fully revive the stock's performance. In the current calendar year, the Dabur stock has gained only 5%, lagging significantly behind the Nifty FMCG index, which has risen by 13%. This performance gap is likely to persist at least in the near term as potential pitfalls could negatively impact earnings, keeping the stock under pressure.
Systematix Shares and Stocks (India) highlighted in a report that approximately 35-40% of Dabur's portfolio is facing near-term growth headwinds. Channel checks indicated subdued second-quarter growth, and Dabur had acknowledged intense pricing competition in the cola segment. Dabur, which markets fruit juices under the Real brand, will need to closely monitor the cola price war and the potential disruption posed by Campa Cola, relaunched in three new variants by Reliance Consumer Products, the FMCG arm of Reliance Retail Ventures Ltd. Given these challenges, a downgrade in earnings estimates for FY25/FY26 by some broking firms is not unexpected. Furthermore, Dabur's valuation appears relatively expensive, despite its positive aspects, including market share gains in specific categories, cost-saving initiatives, and distribution expansion. Bloomberg data indicates that the Dabur stock is trading at a price-to-earnings multiple of around 44 times for FY26. A substantial re-rating of the stock hinges on consistent earnings growth.
Overall, Dabur's September quarter results highlight the challenges the company faces in navigating a challenging market environment. The company is actively addressing its inventory issues and is optimistic about improved performance in the coming quarters, fueled by growth in alternative channels and an anticipated uptick in rural and winter demand. However, the stock's performance remains uncertain, with potential headwinds impacting earnings and contributing to its relatively high valuation. The consistency of earnings growth will play a crucial role in determining the future trajectory of the Dabur stock.
Source: Dabur's September-quarter update pours cold water on market hopes