Dabur's first-quarter fiscal 2016 earnings rose 24%, aided by 320 basis points of gross margin expansion over last year, as commodity prices remain benign across most raw material products. Despite higher administrative, depreciation, and advertising expenses, EBIT margins expanded 110 basis points to 14% in what is seasonally the lowest-margin quarter. This was reflected in higher EBIT margin realization in its primary segments of consumer care and foods (together accounting for 97% of sales), which reported higher EBIT margins of 19.0% and 16.6% respectively, versus 17.7% and 13.4% last year.
However, sales growth of 11% paled in comparison to our 15% forecast for 2016 as both consumer and foods witnessed slower growth. The company said it has begun focusing on expanding its urban distribution to be well positioned for further margin expansion as urban sales pick up with economic sentiment improving. On its rural foray, management said it is slowing down its expansion as the rural business tends to be a low-margin, high-volume game. We believe there are ample opportunities for either an urban or rural go-to-market strategy. We remain optimistic about the potential of Dabur's business; however, we believe the stock is overpriced at these levels. We maintain our INR 175 fair value estimate and narrow moat rating.
Management expects 100-basis-point improvement over last year's EBITDA margins. That would mean EBIT would hit 16.3% in fiscal 2016, which we are skeptical about the company achieving as it continues to invest in new product launches and advertising; that may hinder margins from flowing all the way through to the EBIT line for the remainder of fiscal 2016. While our bull-case valuation reflects this optimistic scenario, our base case projects margins improving to 16.1% by 2020 and the company increasing revenue and earnings at 15% on average over the next five years.
