Buy Jyothy Labs Ltd For Target Rs.180 - ICICI Securities
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Decent execution but (serious) gross margin woes
JYL continues to execute well – (1) 7% YoY volume growth (5.1% on 3-year CAGR basis), (2) focus on laying (medium-term) building blocks including expansion of rural distribution. While in the near-term, concerns on margins (gross margin contracted 710bps YoY) mask improving fundamentals, medium-to-long term, in our view, is all about revenue outperformance vs peers.
With a better performance, we expect the narrative to also improve (in the medium-term) – (1) sustaining top-line trajectory, (2) return of pricing power in Ujala fabric whitener along with brand extensions (concerns on brand being exgrowth are not warranted, in our opinion). We like the brands potential under Jyothy Labs portfolio. BUY maintained.
After ~30 years of association with JYL, Mr Ullas Kamath, Joint Managing Director is not seeking re-appointment and has decided to pursue other interests. During his tenure, Ullas, alongwith other senior management worked closely with Mr M P Ramachandran, Promoter in growing JYL to ~Rs20 bn revenues.
* Decent volume growth momentum: In 3Q, consolidated revenues grew 13% (volume: +7%). All segments posted decent performance (all 2-year CAGRs) – Dishwashing and HI posted strong comps, up 16% and 10%, respectively. Fabric care (+10%) also had a decent recovery with post-wash segment benefitting from normalisation. Personal care segment posted decent performance. The company highlighted (1) mixed consumer sentiment with higher inflation impacting offtake and (2) high competitive intensity.
* Significant gross margin contraction: Gross margins contracted 710bps YoY to 41.6%. Some sequential recovery from the lowest-ever print in the previous quarter (40.1%) was driven by (1) pricing action and (2) improved product mix – post-wash recovery also augurs well for margins. It is looking to offset the impact through other levers: (1) lower trade schemes, (2) cost optimisation measures and (3) calibrated portfolio-approach for price hikes.
* Focus on strengthening distribution: It is taking initiatives to improve efficiency. JYL has strengthened rural focus by (1) expanding distribution and (2) thrust on LUPs to drive trials – driving van sales to improve reach. Lastly, increased use of technology and digital capabilities are signs of great execution in the current challenging environment. Besides, it is also driving increased brand building initiatives and category development measures.
* Valuation and risks: We cut our earnings estimates by ~11% for FY23E. We model revenue / EBITDA / PAT CAGR of 12 / 11 / 13 (%) over FY21-23E. We maintain BUY with revised DCF-based target price of Rs180 (was Rs200 earlier). At our target price, the stock will trade at 25x P/E multiple Mar-23E. Key downside risks are high competitive pressure and RM inflation impacting margins.
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