We downgrade the stock to ‘hold’.

Q4 growth was below expectations: 1) Dabur delivered domestic FMCG volume growth of 25.4% y-o-y in Q4 (on a benign base of -14.6% in Q4FY20), which was below Street expectations. But this was in part due to pipeline inventory correction. 2) Standalone ebitda margins declined 324bp y-o-y led by input price pressure, which Dabur aims to mitigate by price hikes (minimal) and cost cuts. 3) International growth of 21% was a strong underlying performance. 4) Overall, consolidated net sales/ebitda/clean PAT grew by 25.3%/25.6%/25.5% y-o-y, respectively. We cut our estimates, which leads to our new TP of Rs 580 (from Rs 630), which implies c6% upside. We downgrade the stock to ‘hold’.

What stood out: 1) HPC segment delivered 33% sales growth in Q4, led by strong performance in oral care (up 42%), while Skin Care (+38%) and Shampoo (+33%) 2) F&B segment delivered 28% sales growth (on a very benign base) even as the institutional business remained impacted. 3) Within healthcare, Ethical (39%) was quite strong on the back of distribution expansion.

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What was lacklustre: 1) Health supplement witnesses some moderation (17% y-o-y, 3.2% two-year CAGR) in part attributed to reduced inventory in the pipeline and seasonal decline in the Glucose segment. 2) Within homecare (+24% y-o-y), air freshener category continued to remain impacted. Overall, barring oral care, all other categories reported low- to mid-single digits growth on a two-year rolling CAGR basis, a marked deceleration from Q3.

FY22E has a high base for growth and rising costs in the near term: 1) Dabur faces a high base of FY21 and aims to still achieve double-digit growth in FY22. 2) Margins are likely to remain under pressure for H1 FY22 and improve in the second half led by judicious price hikes and cost cuts. 3) With the Covid-19 second wave, Dabur still aims to navigate the year with minimum disruption and sees demand of immunity boosting and health supplements products accelerating again.

We continue to see Dabur as the key beneficiary of the wave of naturals and Ayurveda and Dabur is also driving growth by improving its distribution, direct reach and strengthening its business in regions where its presence is lower.

However, Dabur’s FY22e PE multiple of 52x, builds in long-term growth expectations of c14%, which if not excessive will need sustained underlying growth revival.

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