Dabur India- Good 1Q FY14 aided by healthy volume growth; stay OW :: JPMorgan

Against a challenging macro backdrop, Dabur posted healthy volume growth of
9% during 1Q FY14. Consolidated Net Sales, EBITDA, and PAT grew 13%,
15%, and 21% y/y respectively. While sales growth was marginally ahead of
expectations, EBITDA margin expansion at 30bp y/y was lower than expected.
Management remains fairly optimistic about FY14 performance supported by 8-
12% domestic volume growth (rural-led), price rises of 4-5%, margin expansion
and recovery in growth rates for Namaste operations. We estimate 19% EPS
CAGR over FY13-15 which is one of the highest growth rates across our coverage
universe. Our price target rises to Rs190 as we roll it forward to Sep-14.

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 Domestic volume growth at 9% reflects gains from company’s focused
strategy to enhance its distribution reach in rural markets (rural sales grew
14.2% vs urban at 9.6% during 1Q) and significant brand investments.
Recovery in CSD channel sales (~5% of domestic sales) and healthy modern
trade sales also supported growth rates. Domestic FMCG growth of 13% y/y
was led by home care (+26% y/y), shampoos (+23% y/y), foods (+19% y/y),
and toothpastes (+14% y/y). Organic overseas business registered 17.5%
growth (vol:15%, price:-0.7%,currency:3%). Namaste witnessed a recovery in
growth, posting 16% sales growth supported by 3% translational gains.
 Margin expansion continues, albeit at a modest pace: Much of the GM
expansion gains of 115bp y/y was negated by higher staff and other costs.
A&P/sales (though lower 30bp y/y) was still high at 15.4%. Consol EBITDA
margins as a result were up 30bp y/y. Management expects a ~100bp
improvement in EBITDA margins in FY14 supported by price rises, significant
increase in operating margins for overseas business (100-150bp) and controlled
ad spend. We build in a 60bp EBITDA margin expansion for FY14.
Other mgmt call takeaways: a) FMCG category growth rates have slowed
down in recent months, with the slowdown being more pronounced in urban
markets. Rural continues to grow well with growth rates being ~1.5x urban. b)
Comfort about a moderation in raw material costs is waning given the recent
sharp currency depreciation, uptick in crude oil prices, and sustained inflation in
commodities such as honey and sugar. c) More price rises are likely with a 4-5%
price increase over FY14 (vs 2-3% expected earlier). d) A&P/sales for FY14
expected at 13-14% with a bias towards the lower end. e) Modern trade channel
(~9% of domestic sales) continues to perform well registering 20%+ growth in
1Q and CSD sales continue to do well. f) The tax rate is likely to be ~21% and
capex for FY14 is estimated at ~Rs1.5-1.75B.