In the September quarter (Q2FY23) earnings call, Dabur said that the market size is larger and more lucrative than a few other categories. In other words, there is enough room for growth in this segment. Also, the overall spices market is largely unorganized, leaving scope for the segment to shift to organized.
Investors approved, taking Dabur’s shares up 3% on Thursday. The company would acquire 51% stake in Badshah before FY23 ends and the remaining after five years. The enterprise value is ₹1,152 crore, which translates into a revenue and Ebitda multiple of 4.5 times and 19.6 times, respectively, based on estimated FY23 financials.
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“Badshah Masala’s acquisition price for 51% stake is higher than what ITC paid for 100% stake in Sunrise in mid-2020," said analysts from JM Financial Institutional Securities. ITC paid around 3.5 times FY21 sales, about 17-18 times Ebitda for 100% of Sunrise (nearly 3 times Badshah’s current size even then), pointed out the broking firm.
Overall, the Badshah acquisition does not move the needle in terms of revenue. Badshah’s FY22 turnover is ₹189 crore. In comparison, Dabur’s FY22 operating revenues stood at ₹10,890 crore. However, it helps that Badshah’s Ebitda margin, estimated at 23% in FY23, would be accretive to Dabur’s foods portfolio.
However, margin headwinds continue to persist for Dabur. It expects inflation in Q3 to be 6% year-on-year (y-o-y). Price hikes would aid growth, which could mean better margins sequentially. Y-o-y, the drop in gross margin is likely to be relatively small. In Q2, gross margin fell sharply by almost 350 basis points (bps) y-o-y to 45.4%. One basis point is 0.01%. This is despite flow-through of price increases and additional hikes taken during Q2.
However, Dabur curtailed the drop in Ebitda margin to 190bps by lowering advertisement spends and implementing cost control measures. Q2 Ebitda margin stood at 20.1% and Dabur aims to maintain this metric in the range of 20-21% in FY23.
Subdued rural demand is another pressing worry, with patchy monsoon in areas such as Uttar Pradesh and Bihar being a dampener. Dabur derives a significant portion of sales from rural markets and hence, demand recovery here is crucial. In Q2, rural business grew by 1%, while urban grew by 6%, said the company. This is the first time in the past five quarters that rural markets lagged urban.
Dabur’s shares are around 12% below their 52-week highs of ₹625 apiece seen in November. The stock trades at 42 times its FY24 estimated earnings, according to Bloomberg data. It helps that the company is seeing market share gains across 95% of the portfolio. Separately, the company announced capital expenditure of nearly ₹326 crore for its Indore project for red toothpaste, one litre juice and portion packs juice.
Dabur is seeing green shoots of demand recovery thanks to the festive season, but it remains to be seen if this persists.
“None of the fast-moving consumer goods companies are calling out a sustainable recovery in demand. We expect the momentum to take one more quarter to improve," said an analyst, requesting anonymity. Against the backdrop of subdued demand and muted margin outlook, near-term triggers for the stock are few and far between.
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