Jyothy Labs: Sustaining (volume) outperformance

JYL’s underlying performance continues to be good – (1) +5% YoY volume (+22%, ex-Household Insecticides) and (2) focus on laying (medium-term) building blocks – rural & LUP focus along with distribution expansion. The good performance was led by Fabric Care and Dishwashing (despite a high base). Weak season impacted HI. Personal Care (mainly Margo) had a soft quarter considering the price hike benefit. Gross margin decline of 350bps YoY and EBITDA margin print of 10% were weak but is likely to have bottomed out.

In terms of categories, the two (larger) segments of dishwashing and fabric care (a multi-brand approach should allay concerns on scalability) continue to perform well and present good visibility in the medium term. We have been highlighting improved volume trajectory in Jyothy – the gross margin weakness is masking improved financial performance. Amongst the value stocks (in our consumer universe), Jyothy continues to be our top pick. BUY maintained.

Continued good volume performance: Jyothy Labs reported revenue growth of 13.7% YoY to Rs 6bn with volume growth of 5%. Ex of HI, volume growth was 21.8%. On 3-year CAGR basis, revenue growth was 12.2%. In terms of segments, Fabric Care recovered well (weak base), with 39% YoY growth while HI had a dull quarter (down 37.5% YoY) due to high base and weak season in markets of North and East. On Fabric Care it highlighted (1) Sales in fabric whitener is back to pre-Covid level, (2) Henko performance continues to be good, (3) Smaller brands of More Light and White are doing well in the current (inflationary) environment. Other segments had decent performance: Dishwashing (+9.6% YoY, increased LUP focus to drive penetration), Personal Care (+2.1%) and others (+11.4% YoY).

Significant gross margin contraction: Gross margin contracted 350bps YoY to 39.9%. On QoQ basis, it is down 160bps. EBITDA margin was down 200bps YoY to 10%. Management highlighted that (1) 2/3rd of the key raw materials are seeing 40-60% inflation, (2) margins are likely to have bottomed out (some RM softening seen), (3) 8-9% price hikes have been taken with ~2% taken in 1Q. EBITDA was down 5% YoY to Rs 598mn. Ad-spends were up 5% YoY. Net profit was up 18.7% YoY to Rs 477mn led by higher other income (asset sale).

Focus on strengthening distribution: Management believes that direct distribution is a critical source of competitive advantage and will continue to ramp-it up. Besides, it is also driving increased brand building initiatives and category development measures. JYL has strengthened rural focus (both urban and rural had positive growth in the quarter) by (1) expanding distribution and (2) driving van sales to improve reach. Lastly, increased use of technology and digital capabilities are signs of great execution in the current challenging environment.

Valuation and risks: Our earnings estimates are largely unchanged for FY24E. We model revenue / EBITDA / PAT CAGR of 11 / 28 / 38 (%) over FY22-24E. We maintain BUY with revised DCF-based target price of Rs 200 (was Rs 180). At our target price, the stock will trade at 24x P/E multiple Mar-24E. Key downside risks are high competitive pressure and RM inflation impacting margins.

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