Dabur India Ltd's domestic volume growth remains steady (~8- 12% guidance) driven by rural India outperformance, and the management remains relatively upbeat on the monsoons. Operating margin gains, however, may be capped given the R weakness. Overall, we pare estimates 2-3% (lower domestic GMs + higher fuel/distribution costs), but still estimate a healthy 19% 2-year EPS CAGR and 15% revenue CAGR.
We think Dabur’s distribution initiatives are more medium term; after doubling number of villages covered in two years, the management expects ~10-12% annual growth — targets 36,000 villages by end-FY14. Further, pilots under way to enhance IT backbone /data analysis/feedback to sales should aid long-term growth. A ~3-4% margin differential that exists between rural and urban India is likely to narrow going forward.
Weak R impacts domestic margins primarily in juices & on account of packaging materials; thus GMs are likely to be lower than earlier expectations and the quantum of price hikes perhaps moves up. However, the impact is relatively lower compared to many peers. As the transition phase in Namaste (US re-launch + Africa distribution restructuring) is largely behind us, we expect it to grow in the teens (constant currency) in FY14- 5E. Maintain buy on Dabur with R190 TP (R195 earlier).