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Continued momentum on growth and share gains, margins a dampener; but retain BUY on reasonable valuations

Our view

Key positives were strong revenue growth in Fabric care and Dish wash segment driven by increased mobility and aggressive distribution and marketing initiatives leading to share gains for Ujala and Exo. While a 2‐yr CAGR growth of 11% for the second consecutive quarter is commendable, a sharp 600bps dip in margins despite a 5% price hike and 2% efficiency benefits remains a headwind. While company’s focus to drive volume growth at the expense of margins to gain scale and operating leverage will keep margins in the range of 13‐14% vs historical range of ~16%, its strategy of differentiated product positioning and aggressive marketing behind power brands is driving share gains in key categories.  Its focus on new launches, high A&P spends, and technology‐led distribution enhancements should be key drivers to drive double‐digit earnings growth. At current valuations of 26x, stock looks attractive and we maintain our BUY despite the margin‐led cut in our earnings estimates.

Result Highlights

* Topline – Revenue growth of 21.4% led by 16.6% volume growth and 5% price increase, 2‐yr revenue CAGR at 11%. Fabric care/Dishwashing/HI/Personal care registered 27.4%/22%/12.7%/13.5% growth respectively. HI recorded robust growth on a strong base aided by increased focus on hygiene and seasonality. Laundry services continue to report decline owing to constrained out‐of‐home activities. Other segment including T‐shine and Maya had ~44% YoY growth.

* Segmental performance – Fabric care revenue growth of 25% and 16.2% EBIT margin vs 22.1% YoY, Dishwashing revenue growth of 13% and 11.3% EBIT margin vs 19.5% YoY, HI revenue growth of 4% and  ‐5.6% EBIT margin, Personal care revenue growth of 5.3% and 15% EBIT margin vs 25% YoY.

* Margins – Gross margin plunged 760bps due to inflation in input costs and inferior product mix. EBITDA margin declined 590bps YoY on account of continued aggression in A&P spends

* Earnings growth – PAT declined by 29% YoY while grew ~9% QoQ owing to sharply lower profitability.

* Outlook – Company continues to focus on volume‐led growth to achieve higher scale with margins in the range of 13‐14%. Brand building and innovation to drive market share gains with enhanced distribution network will be key focus areas.

Valuation

We build in revenue/EBITDA/PAT growth of 12%/19%/10% over FY21‐24E. We trim our estimates to incorporate lower margins in the near‐term but slightly higher growth over the next two years. We revise our TP to Rs 200 and maintain our BUY rating based on 25x FY24E earnings.

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