Dabur’s Q4FY20 weak results were followed by muted management commentary on the near term outlook.

Dabur’s Q4FY20 weak results were followed by muted management commentary on the near term outlook. We also expect an impact on FY21 earnings owing to its high dependence on wholesales and on the profitable MENA business getting affected by the sharp crude price decline. Valuations are fair (43.7x FY22e EPS) and prevent us from turning more constructive on the stock. Maintain Neutral.

Disappointing results; 14.6% volume decline in domestic FMCG business
Dabur’s Q4FY20 consolidated sales declined 12.3% y-o-y to `18.7 bn. Ebitda declined 23% y-o-y to Rs 3.5 bn. PBT was down 22.4% y-o-y to Rs 3.6 bn. Adj. PAT declined 31% y-o-y to Rs 3 bn. FY20 consolidated sales/Ebitda/ Adj. PAT grew 2%/ 3%/1.5% y-o-y.

Gross margins contracted 70bp y-o-y to 49.1%. Ebitda margin contracted 260bp y-o-y to 18.9% in Q4FY20. Standalone sales/ Ebitda/adj. PAT declined 17.3%/24.3%/ 38% y-o-y. Ebitda margins contracted 210bp y-o-y to 22.6%. The domestic FMCG business reported an underlying volume dip of 14.6%.

Balance sheet performance: Cash conversion cycle stood at 11 days. OCF was up 7.6% while PAT was up 1.5%. FCF stood at Rs 12.1 bn (4.8% decline y-o-y).

Highlights from commentary
The COVID-19 crisis in Q4FY20 resulted in Rs 3.6-bn impact on top line and Rs 1.1 bn on the bottom line. Likely impact in Q1FY21 – assuming no further lockdowns – would be Rs 4.5 bn on revenue and Rs 800-900 m on PAT. India business volumes declined 14% in Q4FY20 (it was up 4.2% in Jan- Feb’20). Thus, on a calculated basis, decline in Mar’20 volumes was ~50%. Management expects the COVID-19 impact on rural growth to be limited due to lower case incidence in the hinterland and favourable factors like robust Rabi cash flows, MNREGA allocation increase and likely good monsoons.

Valuation and view
Weak results and muted near-term outlook has led to 7.4%/9.0% decline in EPS forecasts for FY21/FY22e. Dabur’s new CEO has introduced many initiatives such as (a) growing the Healthcare segment; (b) the power brand strategy; and (c) new launches. While these hold promise from a longer-term perspective, earnings growth for FY21E is likely to be weak, continuing the tepid trend of the previous 5 years (~7% EPS CAGR). The high wholesale dependence and international business (especially in the MENA region) is also likely to impact top line growth in the near term. Maintain Neutral with TP of Rs410 (42x FY22e EPS, in line with 5-year average).