FY14F looks poised to be a year of strong profit growth, says Nomura Equity Research in its Quick Note on Dabur India

Dabur India reported solid results for the fourth quarter of FY13, with volume growth of 12%, which was a key positive. Margins improved by 120 basis points (bps), which was ahead of Nomura’s and consensus expectations. The management was confident of delivering robust volume growth and an improvement in margins in FY14F. Q4FY13F results gives confidence that some of the disruptions as a result of the revamp of the distribution system are now firmly behind and FY14F looks poised to be a year of strong profit growth. These observations were made by Nomura Equity Research in its Quick Note on the company’s performance.

Key highlights from Dabur’s Q4FY13 results

• • Revenue growth for the quarter was at 12.3% to Rs15.3 billion. This compares with Nomura’s estimates at Rs15.95 billion and consensus at Rs15.65 billion.
• • EBITDA margins came in at 17% versus Nomura’s forecast of 15.7% and consensus at 16.7%. This was a positive surprise.
• • Net income came in at Rs2.06 billion compared to the brokerage’s forecast of Rs1.94 billion and consensus at Rs1.99 billion.
• • Gross margins are +190bps y-o-y, which is a sportive and similar to the other consumer companies which have reported thus far. This is likely to be a positive across the sector in H1FY14F.

In segmental performance, Dabur’s consumer care business revenues rose 13.1% to Rs12.9 billion with margins improving by 10 bps y-o-y. Foods business revenues improved 19.4% with margins down 300bps. The Real brand delivered market share gains.

As per the management’s conference call, post-results:

• • Improvement of the distribution platform is now complete and has helped improve the volume growth trajectory. The company expects to benefit from this in the medium term as it helps to improve product mix across stores.
• • Skin care is the most discretionary segment within the HPC (home and personal care) portfolio and should continue to remain sluggish in the near term. This is similar to comments from Hindustan Unilever and shows that there are parts of the portfolio which will continue to be weak in H1FY14.
• • Namaste business has had a disappointing year, but given the changes to the management team, the company appears confident that FY14 will shape up better than FY13. However, this could be more back ended in FY14, so the first couple of quarters could continue to be soft.
• • The management is confident of taking price increases if required. However, given the benign input cost environment, outlook for price increases is more cautious. Management is now looking for price increases to the tune of 2%-3% in FY14, as against its earlier expectation of 4-5%.
• • On gross margins, the company expects c.100-150 bps improvement in FY14 on a y-o-y basis. This is a strong positive as it not only means that the management will have more levers to make investment in A&P, but also shows strong visibility on the input cost environment.
• • CSD channel has not yet returned to normalcy. However, the channel itself has adjusted to lower inventory levels, and going forward, the channel is likely to grow at the same pace as the domestic business but margins will be impacted negatively.
• • A&P to sales ratio is likely to be close to 13%, but as always, this is going to be volatile on a quarterly basis. The management remains confident that 13% level gives enough room to help support their brands in the domestic business.

• Volume growth guidance for FY14F should continue to be 8%-12% as in most years. But for FY14F, management expects to come in at the top end of that guidance, which is a positive.