FMCG major Dabur faces continued margin pressures, growth challenges

Dabur’s pre-quarterly update for Q3FY25 disappointed the market with the share dropping by 3.9 per cent. Growth was slower than expected and inflation hit margins. The management said that the fast-moving consumer goods (FMCG) consumption in rural markets was resilient and continued to grow faster than in urban markets. While activity in the general trade channel was muted, alternative channels like modern trade, e-commerce, and quick commerce delivered stronger growth.

 

While Home & Personal Care (HPC) is expected to grow in mid to high single digits in Q3FY25, health care is expected to be flat. Beverages will report muted performance - it is facing higher competition due to the rising presence of Campa Cola.

 

The culinary business under brands ‘Hommade’ and ‘Badshah’ may post strong double-digit growth. The international business is also expected to register double-digit growth in constant currency terms, with momentum in the Middle East and North Africa (MENA), Egypt, Bangladesh, and the US. Domestic volumes are likely to be flat year-on-year (Y-o-Y) due to pressure in the general trade channel.

 

Bloomberg consensus was at 4 per cent sales growth and 2 per cent earnings before interest and taxes (Ebit) growth but management guidance suggests there may be a miss. The management guides that consolidated revenue will see low single-digit growth (estimated 3 per cent Y-o-Y in Q3FY25 after minus 6 per cent Y-o-Y in Q2FY25 and 7 per cent in Q3FY24). Inflationary pressure was seen in some segments, and partially mitigated through price increases and cost-efficiency initiatives.

 

Operating profit may be flat. Consolidated operating profit was minus 16 per cent in Q2FY25, and up 10 per cent in base quarter Q3FY24. The operating profit margin may be lower than consensus due to inflationary pressures which may lead to a Y-o-Y decline in margin. The delayed onset of winter hurt the seasonal healthcare portfolio. There may be a destocking risk in healthcare since a longer, earlier winter was expected and inventory buildup was seen.

 

Domestic business is witnessing continuing challenges in traditional trade. But rural growth may aid acceleration in HPC on a quarter-on-quarter (Q-o-Q) basis. In beverages, Q2FY25 secondary sales were down 11 per cent, and Q3FY25 primary sales may be in line with this downtrend. The aggressive marketing of Campa Cola has included retailer incentives and consumer promotions while Dabur mostly offers consumer promotions. As part of cost-efficiency initiatives, advertising and promotional spend may have been adjusted. The sales mix may also have deteriorated since the higher-margin healthcare portfolio exhibited lower growth.

 

Many analysts have downgraded growth and margin expectations in response to the update. There are implications for the entire FMCG sector since Dabur is a consumer major with a presence across several segments. It’s likely that other corporates in the same segments may report similar trends.

 

That is, slow urban consumption and slow activity in general trade which is only partly offset by better movement in new channels. The margin trends could also be similar for other FMCG brands, given some raw material inflation, delayed winter, and higher competitive intensity in beverages.  

 

Given the nine-month trends in FY25, it’s likely that operating profit and net profit for FY25 will be flat or only marginally better than FY24. It is possible that dividend payout may be controlled or curtailed. Some analysts do believe that cash flow from operations may be substantially higher than in FY24. Several analysts see an upside of over 20 per cent from the current market price.