Any time inflation threatens an economy, the central bank raises interest rates. This is done so inflation gets tamed as borrowing becomes more expensive, liquidity in the system gets crunched, and the economy slows down.
In the fast-moving consumer goods (FMCG) market, three developments are anticipated due to inflation - good, bad and ugly.
Unfortunately, Dabur has been on the wrong side of the equation. It is among the worst-performing FMCG equities over the last year. It is down 10%, while the Nifty FMCG index is up 13%.
The Good, Bad and Ugly Outcomes of Inflation
Investors seek safety in defensive stocks, and the FMCG industry is the most well-known of them In theory, this might boost shares of consumer-goods companies
Consumers are unable to spend as freely and as a result, buy smaller packs, go for brands with lower price points, demand deeper discounts, and buy less Some FMCG companies might see a drop in sales as a result of this
The majority of costs for any FMCG company include food, packaging and transportation Inflation hits companies as much as it hits consumers If FMCG companies aren't able to pass costs on to their consumers, and see demand reduction, it’s a double whammy
Good, bad or ugly depends on what kind of goods a consumer company sells - staples or discretionary items:
Staples (stuff that you can't do without) - toothpaste, milk, tobacco (ask the addicts!)
Discretionary (things that you could easily give up or consume less of) - cosmetics, supplements, gourmet packaged goods
And ugly, on how bad your cost portfolio is, and at parallel if you’re selling staples or discretionary items.
The Indian FMCG Pack
In India, in the past year, since inflation became a problem, the Nifty FMCG index has far outperformed the Nifty 50 (+13% for FMCG versus +3% for Nifty 50). The index seems to be on the right side of the equation.
ITC (cigarettes) and Varun Beverages (Pepsi) seem to be investor favourites, with a performance largely unaffected by inflation. Everyone seems to be smoking cigarettes and drinking cola despite higher prices.
And then there are the bad performers Emami (cold cream and fairness products), Radico Khaitan (8 PM whisky and Magic Moments vodka), Marico (hair oil), and Dabur (Chyawanprash and Honitus cough syrup).
Can You Live Without Dabur?
In 2QFY23, while revenue for Dabur increased by a mere 7% YoY, its operating profit fell by 2% YoY.
Although a household name, Dabur’s product portfolio doesn’t necessarily scream “staples”.
Chyawanprash, Hajmola, Vatika and Fem and are things that one can live without, especially in an inflationary environment, much to an Indian parent’s dismay.
Moreover, Dabur hasn't been able to pass on mounting cost pressures to its consumers in the form of price hikes.
It has seen a massive slowdown across the:
Health Supplements - Chyawanprash and Dabur Honey
Digestives - Hajmola and Pudin Hara
OTC Products - Honitus
Skincare - Fem, Gulabari
On the other hand, there have been a couple of outliers:
Home Care - Odomos and Odonil
Food & Beverages - Real
Real is a good example of how the performance of a brand can be unaffected by inflation. Real has a 65% market share in the Juices & Nectars category. As the industry leader, it has been able to charge higher prices to reflect the effects of inflation while simultaneously growing in sales volume.
Who Does It Sell To?
Dabur's rural presence is extensive, extending to 1 lakh villages, and 45% of the company's revenue comes from these areas. Since the beginning of 2022, rural India's inflation has been higher than that of India's cities.
The food index (which accounts for 54% of the entire CPI in rural regions, compared to 36% in urban areas) is the primary factor in the greater rate of rise in the CPI index in rural areas.
Rural markets felt the effects of inflationary pressures more acutely, and demand growth lagged behind urban markets. Due to their reliance on agriculture for income, rural consumers are often the first to feel the effects of inflation.
In 2QFY23, demand increased by a mere 1% in rural areas and by 6% in urban areas. Furthermore, cheaper unit packs are performing better in rural marketplaces, indicating a trend of downtrading.
What Happens Next?
As the CPI print for October hit a three-month low, it appears that inflation in India has peaked and is beginning to decline. There is a reason for optimism about the future of Dabur, given the company is trading cheap and demand revival expectations exist.
Additionally, urban employment is increasing, which would mean that rural migration and non-farm income with remittances to villages increase and more money in the pockets in the rural economy-that augurs well.
Moreover, good monsoons and an upcoming general election bode well for rural demand.
Although Dabur's operational profit has decreased YoY marginally, the company stands to benefit from the slowing inflation environment. Coupled with cost optimisation measures, and measured price hikes, gross margins are likely to improve over the next few quarters.