Dabur’s third-quarter fiscal 2016 earnings were up 12.6%, despite revenue increasing by just 2.4%. EBIT margins in its consumer business (83% of total sales) showed improvement of 150 basis points over the prior-year quarter, moving to 22.7%, as the company continued to ride the commodity tailwind and took fewer price cuts compared with competition. As a result, some of its products, such as shampoos (up 2%), faced increasing price competition from other players, especially in the small stock-keeping unit area of sachets. Additionally, food sales (13% of sales) declined 24%, owing to political unrest in Nepal that affected Dabur's primary juice-manufacturing plant, further pressuring the firm's top line. Management advised that it has arranged additional supply for juice from third-party vendors and its other facilities, and the company should see future normalisation in sales.
In light of this performance, we are cutting our 2016 revenue growth forecast to 7.2%, down from 15.4%, while retaining our long-term outlook for 14.5% annual growth between 2017 and 2020. We believe that rural and urban consumption will see an uptick in the coming years, given that inflation is kept under check, and given better monsoons and better job prospects in a more stable economy, with some of India's macroeconomic concerns having been resolved. We adjust our EBIT margin for 2016 to 16.0%, up from 15.2%, as the company continues to experience heightened gross margin expansion. As a result, our earnings growth for 2016 is now 9.5%, versus our previous assumption of 11.6%. Despite these changes to our estimated profits, we reiterate our fair value estimate of INR 175 per share, as the time value of money since our last update in January 2015 offsets the cut in our revenue forecast. In our view, the stock still looks overpriced, even though the price has decreased by nearly 20% over the past six months, moving closer to our unchanged fair value estimate for this narrow-moat company.
