Second-quarter fiscal 2016 earnings for Dabur India rose 19% as it continued to ride the commodity tailwind, with gross margin for the quarter at 55% versus a historic three-year average of 52%.
While earnings were ahead of our five-year average earnings forecast of 15.8%, revenue growth was slower at 9% versus our 15% estimate as the first half of the year tends to be seasonally slower from a topline perspective. Both lower revenue and higher margins can be attributed to the performance of its key consumer care segment, which accounts for 83% of sales, and recorded EBIT margins of 24% versus 21% last year.
Our margin expansion thesis from improved product mix continues to play out, however, we believe the tailwinds of commodity prices will eventually reverse in the remainder of the year. We believe the year will end at 15% EBIT margins versus management guidance of 16%. We continue to hold our INR 175 per share fair value estimate on this narrow moat stock which we believe is currently overvalued.
Dabur India continues to focus on maximising distribution for its higher-margin personal care and health-care products, through its newly established doctor advocacy salesforce, or medical representatives. (The company has already hired 170 employees in the program and is on track to achieve its 275 target by March 2016).
Management has been adequately spending on advertising (accounting for 13.3% of sales for the quarter), and we believe this will be important to protect its niche herbal turf as new home-grown competitors such as Patanjali Ayurved begin to expand their presence in similar consumer categories of personal care and food, with competing Ayurveda-based formulations.
