Dabur India's Q2FY19 results (Outperformer) - A challenging quarter on multiple fronts

Q2FY19 result highlights

• Consolidated revenues were up 8.5% yoy at Rs 21bn (est: Rs22bn), EBITDA was up 7% yoy at Rs4.5bn(est: Rs4.76bn) and PAT was up 4% yoy at Rs 3.8bn (est Rs3.8bn).
• Domestic FMCG grew by 8.6% yoy with a volume growth of 8.1% yoy.
• Consolidated gross margins decreased 70bp impacted by higher input costs & adverse currency. Staff cost was up by 15% yoy. Other expenses grew by 8.5% yoy and A&P spends decreased by 8.4% yoy. Resultant EBITDA margin declined of 20bps yoy.
• HPC posted growth of 10.2%. Healthcare revenues increased by 10.6% yoy. In foods business, Beverages sales grew by 1.5% yoy. Oral care recorded growth of 3.9% with toothpastes growing at 6.2%. Hair oil category grew by 11.1%, Shampoos reported strong growth of 49% yoy. Home & skin care posted growth of 10.9% & 11.9% respectively.
• International Business posted constant currency growth of 7% led by Egypt, SSA, Turkey which grew by 27%/16%/16% in cc terms.

Key positives: Strong growth in Hair care, Health supplements & Dabur red

Key negatives: Lower margins & Weak subsidiary performance

Impact on financials: We have cut our FY19-21E earnings by 3% each.

Valuations & view

After a strong start to FY19, Dabur 2Q performance was below par considering the miss on volume and margins. With focus on driving volumes & protecting share, we expect domestic FMCG volume growth to come back to double digit in 2HFY19 which coupled with price/mix improvement will drive the revenue growth. We believe near term margin expansion is unlikely due to input cost inflation & challenging environment in International business. We are factoring 14% revenue CAGR & a more gradual margin expansion resulting in 18% earnings CAGR over FY19-21E. We have cut our target multiple & valuing Dabur at a 20% discount to HUL. We continue to like Dabur’s diverse & naturals oriented portfolio and its initiatives in terms of innovations, distribution expansion & aggressively defending market share. The stock has corrected ~20% from the recent peaks & valuations at 37x/32x FY20/21E capture the modest performance expected over the next two quarters. Maintain Outperformer.