Buy Jyothy Labs Ltd For Target Rs.200 - ICICI Securities
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Growth improves, narrative to follow
JYL’s robust top-line momentum – double-digit 2-year CAGR (11%) – is clearly under-appreciated by the street. While in the near-term, concerns on margins (gross margin contracted 750bps YoY) mask improving fundamentals, medium-tolong term, in our view, is all about revenue outperformance vs peers (proof can be seen in market share gains in almost every category).
What can improve the narrative going forward – (1) sustaining top-line trajectory, (2) return of pricing power/growth in Ujala fabric whitener along with brand extensions (concerns on brand being ex-growth are not warranted, in our opinion), (3) sustainable margin improvement (higher brand spends (+35% YoY) and recent gross margin contraction, limiting it for now). We like the brands potential under Jyothy Labs portfolio. BUY maintained.
* Strong growth momentum across segments: In 2Q, consolidated revenues grew 16% (volume: +11.4%), +11% on a 2-year CAGR basis. All segments posted decent performance (all 2-year CAGRs) – Dishwashing and HI posted strong comps, up 18% and 13%, respectively. Fabric care (+5.1%) also had a decent recovery even as post-wash segment is still to recover fully. Personal care segment posted 9.8% growth. The company highlighted (1) both rural and urban doing well (despite some moderation in rural) and (2) MT and CSD are back to pre-Covid level.
* Significant gross margin contraction: Gross margins contracted 760bps YoY to 40.1% (lowest ever). Besides taking some price hikes, it is looking to offset the impact through other levers: (1) lower trade schemes, (2) improving product mix – further 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, increased use of technology and digital capabilities are signs of great execution in the current challenging environment.
* Valuation and risks: We cut our earnings estimates by ~22%-4% for FY22 and FY23E. We model revenue / EBITDA / PAT CAGR of 12 / 12 / 15 (%) over FY21- 23E. We maintain BUY with unchanged DCF-based target price of Rs200. 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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