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Facing the challenges well

Channel inventory rationalization exacerbated the weakness in some of JYL’s existing categories leading to 2-year CAGR revenue decline of 2% in 4Q (adj. growth up ~3% as it implemented continuous replenishment system which had an ~8% impact on primary sales in 4Q). High margin post-wash business was impacted for most of the year; ex-post-wash FY21 revenue growth was ~6% higher (18%).

Focus on rural expansion (adding sub-stockists, driving LUPs), rationalising channel inventory and continued media intensity are positive steps despite near-term challenges. Improvement in cash generation due to better working capital management (WC days improved to 21 in FY21 from the range of 38-55 days in FY16-20), if sustained, is a rerating trigger. We continue to like the potential of JYL’s brands. BUY; TP Rs190.

* Adj. revenue growth of 14% in FY21:

In 4Q, consolidated revenues grew 26% (volume: +24%), - 2% on a 2-year CAGR basis. Channel inventory rationalization and CRS implementation had a Rs500mn impact on primary sales for the quarter; adjusted 2-year revenue CAGR was ~3%. Margins print was subdued due to weak product mix (post-wash continued to be impacted) and inflationary RM. Dishwash continued to perform well; other segments of HI and Personal care were slightly weak.

* Focus on rural expansion and business efficiency.

JYL has strengthened rural focus by (1) expanding distribution (added new sub-stockists), (2) thrust on LUPs to drive trials (expects good conversion) and (3) driving van sales. It has also increased focus on new product launches/refreshes and media spends to drive growth. Lastly, financial prudence helped (1) lower channel inventory (down to 8-10 days from 25 days) and SKU rationalisation and (2) achieve net cash position (after many years). JYL is taking technology initiatives to improve efficiency and decision making.

* Looking at multiple levers to offset RM pressure:

Management indicated 5-6% inflation for its RM basket. Besides taking some price hikes, it is looking to maintain margins through other levers: (1) lower trade schemes, (2) improving product mix – revival of post-wash and higher share of LVs in HI should help and (3) calibrated portfolio-approach for price hikes.

* Valuation and risks:

We fine-tune our estimates – marginal cut in EBITDA is offset by lower ETR. We model revenue / EBITDA / PAT CAGR of 10 / 12 / 17 (%) over FY21-23E. We maintain BUY with an unchanged DCF-based target price of Rs190. At our target price, the stock will trade at 23x P/E multiple Mar-23E. Key downside risks are high competitive pressure and RM inflation impacting margins.

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