Dabur’s stock needs steady growth ahead
Premium- Dabur’s shares are down about 16% from their 52-week highs seen in September on NSE.
- Bloomberg data shows Dabur stock trades at nearly 46 times estimated earnings for FY23
Fast-moving consumer goods (FMCG) companies are facing two key challenges, the sharp rise in raw material costs and the slowdown in rural demand. Unsurprisingly, shares of many FMCG companies have declined from their peaks, including those of Dabur India Ltd. True, the extent of pain because of the cost inflation and rural slowdown varies for each company. Dabur’s shares are down about 16% from their 52-week highs seen in September on NSE.
Valuations have corrected to that extent, but are not particularly cheap. Bloomberg data shows that Dabur stock trades at nearly 46 times estimated earnings for FY23. This is lower than its bigger peer, Hindustan Unilever Ltd (HUL), which trades at 52 times. On an EV/Ebitda basis, both stocks trade at similar levels. EV is enterprise value and Ebitda is earnings before interest, taxes, depreciation, and amortization.
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“Based on estimates for FY23, Dabur and HUL’s EV/Ebitda multiple stand at 36 times each. Valuations of FMCG stocks are typically benchmarked to that of HUL, but we do believe that Dabur deserves a premium because of its higher exposure to ayurvedic products," said Manoj Menon, head of research, ICICI Securities Ltd. “There is a certain amount of investor apathy towards FMCG stocks at the moment and, in keeping with that mood, Dabur’s shares, too, have corrected from their highs," he said.
Motilal Oswal Financial Services Ltd’s analysts said in a report on 18 February, “Our investment thesis on Dabur is premised on the following key attributes: a) highest topline growth visibility among peers, b) consistent market share gains across categories, and c) potential to record even faster earnings growth post-completion of its ongoing investment phase."
For the nine-months ended December, Dabur’s revenues have increased by 16% year-on-year and the company seems poised for double-digit growth for the year as a whole. For the three-months ended December (Q3FY22), Dabur did better than many of its peers on two-year revenue compound annual growth rate.
Nevertheless, the company’s domestic volume growth decelerated markedly to just 2% in Q3 after double-digit growth in the previous five quarters. The weak performance of the healthcare portfolio as a result of a high base weighed on Q3 volume performance. According to Dabur, excluding the covid-contextual range of Chyawanprash and Honey, its domestic FMCG volume growth stood at 8% in Q3.
“We are not really fans of dissecting growth based on what works best at a particular point of time, given that these so-called ‘covid-contextual’ products are quite core (and was referred to be so when growth was good) to the portfolio," said analysts from JM Financial Institutional Securities Ltd their Q3 results review report.
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As such, overall volume and revenue performance would be key monitorables in the days to come. The healthcare portfolio could revert to normalised growth levels ahead. New launches help, though their contribution was 3.6% to sales in Q3 and are yet to gain notable traction.
“Investors will watch the success of new product launches closely and Dabur’s failure on this front, if any, would be discouraging. Further, Dabur has a relatively high exposure to rural markets and the continuing slowdown is another risk," according to Menon. Sustaining the growth momentum in the beverages portfolio could also be challenging.
In the past one year, Dabur’s shares have appreciated by 7.8%, though the stock is down 4.5% so far in calendar year 2022. Notwithstanding relative comfort on valuations, these concerns may cap significant upsides in the near term.
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