Dabur flags GST risks even as demonetisation still stings

Dabur Flags GST Risk

Dabur India Ltd’s results suggest it will take at least a few more quarters in fiscal year 2018 (FY18) before it is business as usual. That is a tough message for investors in a sector that trades at premium valuations.

Post-demonetisation, sales have improved but not entirely. The unorganized part of the packaged consumers goods distribution channel faces problems. Rural markets offer hope but only if the monsoon is normal. The new elephant in the room is the goods and services tax (GST) roll-out—the management says large distributors are ready but wholesale and retail channels are living in denial.

Dabur’s domestic sales volumes rose by 2.4% in the March quarter, recovering from the December quarter’s decline post-demonetisation. However, growth is not back to pre-demonetisation levels

The wholesale channel continues to see low offtake, especially in urban markets. Prohibition of cash transactions over Rs2 lakh and high levels of scrutiny are affecting business. Semi-urban areas are seeing a better pickup. Dabur is affected more, as a large part of its sales are from the north, where the wholesale channel plays a bigger role.

Volume growth improved but the company’s domestic value sales rose by only 0.7%. Its oral care business did well, but sales in haircare and home care—which together contribute 29% of sales—declined. Health supplements grew by 5%. In haircare, Dabur plans to relaunch the Vatika brand with a stronger Ayurvedic positioning. Foods did well, with 10% growth. Investors will like this. The management said the high perceived risk from Patanjali Ayurved Ltd’s aggressive entry appears to have abated.

At the consolidated level, sales declined by 4.7% as its international business’ contribution was affected both by an adverse macroeconomic environment in some countries and adverse exchange rate movement.

Profitability, however, improved as the company cut back on overheads such as salaries, other expenses and advertising costs (promotional spending was higher). Its Ebitda (earnings before interest, tax, depreciation and amortization) margin rose by 1.2 percentage points over a year ago. Net profit growth was flat, as material costs did not decline as much as sales did. This is despite hiking prices to pass on higher costs. Dabur expects margins to remain stable, and foresees advertising spending and overheads to increase in FY18.

The company gave a sales outlook range of 5-10% in the domestic market for FY18, compared to flat growth in FY17. Clarity will emerge after the September quarter, when the impact of GST will be clear. A neutral impact and a good monsoon should set the stage for higher growth but an adverse development on either front is a risk.

The Dabur stock trades at 40 times its historical price-to-earnings ratio and has risen by 8% since end-February. A high valuation, its March quarter numbers and the risks ahead in the next few quarters call for caution.