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Margin Blues Spoil Dabur’s Q4; valuations tied to growth


Dabur India Ltd’s pre-quarter update in early April for the three months ended March (Q4FY23) had lowered earnings expectations. But the company has disappointed even on those muted expectations. The consolidated Ebitda margin shrank year-over-year by no less than 271 basis points (bps) to 15.3%. In its update, Dabur had said it expected an Ebitda margin decline in the range of 200-250bps.

Certain one-off costs are responsible for the sharper decline in the Ebitda margin in the fourth quarter. In its earnings call, management said it incurred one-time costs of 20-25 crore plus additional charges. The product mix was also unfavorable. Note that advertising and publicity spending was flat in the fourth quarter. Other costs, excluding advertising, increased by almost 21%. As a result, Dabur’s Ebitda margin has consistently declined year over year over the past five quarters, reaching a multi-quarter low in the fourth quarter.

For the full year, Dabur’s Ebitda margin declined approximately 190 basis points to 18.8% in FY23. One factor driving this decline is commodity inflation, which was 12.6%. There has been some softening in commodity costs lately. However, Dabur has said that while the operating profit margin will increase, it will not rise to 20% in at least one year.

Dabur aims to prioritize ad spend to drive demand. It plans to increase ad spend as a percentage of revenue from 5.6% in FY23 to 7-8%. Growth in the relatively low margin food business is expected to moderate going forward and this could provide some relief on the margins front. But the international segment continues to see margin headwinds. Taking these factors into account, the Ebitda margin target for FY24 is 19-19.5%.

On the other hand, Dabur has gained market share in some product categories. In the hair oil portfolio, for example, the company’s market share improved and reached an all-time high of 17%.

Dabur also noticed some green shoots in the rural recovery towards the end of the fourth quarter. Note that rural growth lagged urban growth in the fourth quarter. It goes without saying that a faster rural recovery would improve Dabur’s growth prospects, boosting investor sentiment. Shares of Dabur closed 1.4% lower on Thursday, a day when the Nifty 50 index rose nearly 1%. Valuing the stock at about 38 times estimated earnings for FY25 based on Bloomberg data isn’t demanding. But for valuations to grow, meaningful growth is the need of the hour. Unfortunately, the prospects for this do not seem optimistic for the time being.

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Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.