Dabur India Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Rural recovery underway but uneven: Rural volume growth reached 6.7% after climbing from negative territory, yet remains behind urban channels and is weakest in south India where credit extensions are rising.
• Beverage and Chyawanprash hit by season shift, not demand destruction: A 20-day Diwali shift pushed loading into Q3; management expects Q2 losses to be compensated in Q3, with Chyawanprash advertising already underway.
• Gross margins expanded ~300 bps on material deflation, and the commodity cycle remains on a deflation trajectory, supporting the ~19.5% annual operating margin guidance despite INR36 crores in legal costs this quarter.
• International business delivered 23.6% constant currency growth with 600 bps gross margin improvement; double-digit constant currency growth expected in H2, contingent on Middle East conflict not spreading.
• What to watch next quarter: Whether Chyawanprash and beverage loading actually recovers in Q3, the trajectory of legal costs toward the INR20-22 crore quarterly cap, and any stabilization in south India rural demand.

Rural Demand & Channel Dynamics

• Rural trajectory improving slowly: Rural volume growth moved from negative to 0.4%, then 4%, and now 6.7%, lapping a lower base that management says will persist. Urban channels (modern trade, e-commerce) are growing faster while general trade lags.
• South India the weakest pocket: Credit extensions are picking up because money is not in consumers' hands, causing inventory issues. The worst rural performance ranks south first, then west, then north and east.
• Uneven monsoon the original drag: Deficient and unevenly distributed rainfall hurt rural consumption in Q2, particularly impacting the beverage portfolio where north India carries over 50% salience.

Mohit Malhotra: "So the trajectory of rural is only getting positive as you are lapping over the lower basis and those lower basis will continue for some time."

Portfolio Performance

• New brand extensions scaling: Cool King exited first year around INR20 crores; Dabur Red Bae Fresh gel at INR25 crores turnover; Odomos LVP extension at INR10 crores in early days; baby care portfolio tracking to INR50 crores exit run rate.
• Coconut water capex: INR30-40 crores being invested in aseptic PET bottle capacity to catch up next season after Storia's entry impacted modern trade performance.

Mohit Malhotra: "Chyawanprash is where I think the bus actually stops for us. So we just hope that Chyawanprash business trends up well in the quarter 3."

Namaste Litigation

• Nature of the case: Filed against the entire hair relaxer industry (L'Oréal, Godrej, SoftSheen Carson, Namaste Labs, Avalon, Revlon), alleging harmful health effects from product use. Namaste disputes the claims and stands by product safety. The case is based on what management calls an incomplete and inconclusive study.
• Financial exposure: Namaste portfolio is less than 1% of consolidated revenue. Product liability insurance is in place. Legal costs incurred this quarter were INR36 crores, with insurance covering part and the company bearing the excess.
• Cost trajectory: Management expects legal costs to moderate to INR20-22 crores per quarter going forward, with insurance covering \$300/hour and the company bearing any excess. Such multi-district litigations in the US typically take two years or more, and costs should continue through that period.
• Defense strategy: A joint defence group has been formed with other industry lawyers. Management cites precedent from similar past cases that works in favour of the defence and expresses confidence in winning.
• Portfolio pivot: The company will expedite building the non-relaxer portfolio, which already constitutes 75-80% of Namaste's business.

Mohit Malhotra: "The case has been filed based on an incomplete and an inconclusive study and has absolutely no legal merit."

Margins & Investment Strategy

• Gross margin expanded ~300 bps on material deflation during the quarter. International business saw 600 bps gross margin improvement from its deflationary commodity basket (petroleum-linked, specialty chemicals, edible oils), and the deflation trend is expected to continue through H2.
• A&P spending ramped as planned: Media investments are rising in line with stated strategy after being cut back during the high-inflation period of the last 1-2 years. The target advertising-to-sales band is 8-10%, with power brands in Oral Care, Home Care, HPC, and Chyawanprash seeing the ramp-up. Beverage and food portfolios will see less.
• Annual operating margin guidance of ~19.5% reaffirmed despite the INR36 crores legal cost this quarter; management says it will be either at that level or better as the commodity cycle remains deflationary. Q3 typically peaks on margin while Q4 does not touch 20%.

Mohit Malhotra: "As far as considered purchases of HPC and HC are concerned, I think their advertising becomes very, very important to build the equity and build the brand into the consideration set."

International Business & Geopolitical Risk

• Strong recovery driven by macros and execution: Moderation in inflation and distribution changes delivered 23.6% constant currency growth. The business is entirely HPC, and its commodity basket is deflationary, driving 600 bps gross margin improvement that management expects to continue trending up in H2.
• H2 outlook: Double-digit topline growth and high double-digit constant currency growth expected. The explicit caveat is Middle East conflict: if war spreads to the whole region, business could come into a frenzy. As of now, no impact.

Mohit Malhotra: "As of now, we are not impacted. But if the war spreads to the whole region, then the business can come into a little bit of frenzy and we will have to wait and watch."

Guidance & Commitments

Key Metrics