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Volume-led market share gains in most of categories. Reiterate BUY

In India, a ‘growth market’, investors tend to (rightly) ignore short-term profit sacrifice, provided the trajectory of volume outperformance / market share gains is clear (as it’s DCF-accretive). Jyothy Labs has gained market shares across most of its categories over last few years (See charts 1-6). We like the management’s strategy of prioritising market share gains / volume growth over short-term margins which is impacted due to unprecedented input cost pressure.

In terms of categories, the two (larger) segments of dishwashing and fabric care (a multi-brand approach should allay concerns on scalability) have been performing well and present good visibility in the medium term. We have been highlighting improved volume trajectory in Jyothy – the gross margin weakness is masking improved financial performance. Amongst the value stocks (in our consumer universe), Jyothy continues to be our top pick (link). BUY maintained.

* Market share gains in most of the categories…: Jyothy Labs has gained shares in most of the categories it has presence in over last few years. It has gained market shares in the range of ~120-280bps over last 2 years in most of the categories (Please see charts 1-6). Significant market share gains and sustained growth momentum in the portfolio are pleasing. We like its strategy of prioritising market share / volume growth over margins. In India, a ‘growth market’, investors tend to (rightly) ignore short-term profit sacrifice, provided the trajectory of volume outperformance is clear (as it’s DCF-accretive).

* driven by volume outperformance: Market share gains for Jyothy Labs have largely been driven by volume growth outperformance (pricing taken in line with market leader given JYL is a relatively small player) despite headwinds in fabric care segment due to covid. Jyothy Labs has been in the top-3 in terms of volume performance till FY22 if we compared the volume index with base of FY18-20 (Please see charts 7-9).

* Input pressure masking overall revenue performance: Gross margins for Jyothy Labs have contracted by ~580bps in FY22 over FY20 largely due to (1) steep input cost inflation and (2) underperformance by relatively high-margin fabric care segment. Despite significant decline in gross margins, Jyothy Labs has maintained ad-spends impacting EBITDA margins significantly. EBITDA margin decline could reverse partially with expectations of input cost correction in 2HFY23. We believe that continued investment in brand building will likely further drive market share gains for JYL.

* Valuation and risks: Our earnings estimates are largely unchanged. We model revenue / EBITDA / PAT CAGR of 11 / 28 / 38 (%) over FY22-24E. We maintain BUY with revised DCF-based target price of Rs220 (was Rs200) as we roll forward. At our target price, the stock will trade at 26x P/E multiple Mar-24E. Key downside risks are high competitive pressure and RM inflation impacting margins.

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