Buy Jyothy Laboratories Ltd For Target Rs.200 - ICICI Securities
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Revenue growth (significantly) > peers
JYL’s (new) strategy can be interpreted in two ways. Short-term view can focus on gross margin decline (et al.). Medium-to-long term, in our view, is all about revenue outperformance vs peers (proof can be seen in market share gains in almost every category). In 1QFY22, it reported a robust revenue growth of 21% (2- year CAGR of +11.5%) which was broad-based. Gross margin pressure was significant (-290bps), we reckon, this is it! (this is the bottom). BUY retained.
* Strong growth momentum even as fabric care is still slightly weak: In 1Q, consolidated revenues grew 21% (volume: +16.6%), +11.5% on a 2-year CAGR basis. All segments posted decent performance – Dishwashing and HI posted strong comps, up 22% and 13%, respectively. Fabric care also had a decent recovery despite restricted mobility still weighing on post-wash segment (still down 3% versus 1QFY20 levels though). Personal care segment posted 13% growth. The company highlighted (1) continued trend of rural growth ahead of urban and (2) higher growth in general trade and e-commerce.
* Significant gross margin contraction; looking at multiple levers: Gross margins contracted 290bps YoY to 43.3% (lowest print in the last seven years). We believe inflationary RM pressure is exacerbated by weak mix (post-wash continues to be impacted). Management indicated ~10% inflation for its RM basket. Besides taking some price hikes, it is looking to offset the impact 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.
* Improved execution engine with continued business hygiene: JYL has increased focus on new product launches/refreshes and media spends to drive growth. It is taking initiatives to improve efficiency. JYL has strengthened rural focus by (1) expanding distribution and (2) thrust on LUPs to drive trials. Lastly, continued financial prudence on inventory and receivables are signs of great execution in the current challenging environment.
* Valuation and risks: We cut our earnings estimates by ~3% for FY22 and increase it by ~1% for FY23E. We model revenue / EBITDA / PAT CAGR of 12 / 12 / 17 (%) over FY21-23E. We maintain BUY with revised DCF-based target price of Rs200. At our target price, the stock will trade at 24x P/E multiple Mar-23E. Key downside risks are high competitive pressure and RM inflation impacting margins.
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