Results ahead of expectations; no change in medium term trend
* Jyothy Laboratories’ (JYL) 1QFY21 results were above our low expectations. Sales growth was up only 4%. Ad-spend reduction of 40% (much higher than peers) drove EBITDA margin beat, despite gross margin being much below expectations.
* Despite being much smaller than its peers under our coverage, the company has reported mere 2.5% sales CAGR over the past 5 years and neither the management commentary for Jul’20, rest of the year or subsequent years indicates a substantial revival to steady-state double-digit sales growth. Double-digit sales growth in FY21E is only because of low base due to 24% sales decline seen in 4QFY20. Maintain Neutral.
Significant beat to estimates
* 1QFY21 standalone net sales grew 4.1% YoY to INR4.3b (v/s est. INR3.1b). Volume grew 6.1% YoY. EBITDA grew 19.4% YoY to INR782m (v/s est. INR491m). PBT increased 28% YoY to INR587m (v/s est. INR283m). Adj. PAT grew 40.4% YoY to INR504m (v/s est. INR227m).
* Standalone gross margin contracted 180bp YoY to 45.9% in 1QFY21. Lower ad spends as % of sales (-350bp YoY to 4.6%), lower staff cost (-20bp YoY to 12%) and lower other expenses (-50bp YoY to 11.1%) meant that EBITDA margins expanded by 230bp YoY to 18.3%.
* Consolidated segmental performance: While Fabric care/other product sales declined 23.8%/ 37% YoY, Personal care/Household Insecticides (HI)/ Dish-washing sales grew 0.4%/151.1%/16.6% YoY.
* Fabric care/ Dish-washing/ HI consolidated margins expanded by 250bp/880bp/17pp to 22.2%/20.7%/-3.1% YoY. Personal care margins contracted by 530bp to 25.5% YoY.
Highlights from management commentary
* Positive sales growth of 1QFY21 continued in Jul’20.
* Management has refrained from giving sales growth outlook for the year given the uncertain demand environment. It has also maintained guidance of 15-16% EBITDA margins for FY21 despite healthy margins in 1QFY21.
* Trade offers were low during the quarter in addition to 40% YoY absolute decline in ad spends (higher than peers).
Valuation and view
* For a company with a far lower sales base of INR17.1b in FY20 (v/s peers), performance over the past 5 years has been consistently lackluster, with single-digit 2.5% sales CAGR and 9% operating profit CAGR.
* Sales and EBITDA growth have been flattish over the past three years.
* ROCE at 13% is also far inferior to that of peers. Moreover, no uptick is visible from a medium-term horizon, justifying the valuation of 15x Jun’22E EV/EBITDA (~50% discount to peers). Maintain Neutral.
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