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Margin improves on declining input cost

Jyothy Labs Ltd (JLL) is an Indian FMCG player with products across fabric care, dishwashing, mosquito repellents & personal care.

• We upgrade our rating to Buy with a target price of Rs. 245, considering healthy topline growth & expanding margins.

• For Q4FY23, revenue grew by 13%YoY (consistent double-digit growth in last 10 quarters), primarily driven by price growth (~9.5%YoY), while volume growth was ~3%YoY (3% in FY23).

• Fabric care continued its strong growth (20%YoY), dishwash and personal care segments grew by 9% and 11% YoY, respectively, while household insecticide (HI) growth was flat.

• Operating profit grew by 59%YoY as EBITDA margin improved by 430bps YoY to 14.8%, while net profit grew by 60%YoY.

• Input prices have softened from their peak but are still above FY20 levels. The margins are expected to improve on a sequential basis.

• JLL prioritises volume driven growth by expanding its distribution reach and market share. Direct reach has crossed 1.1mn retail outlets.

• We expect revenue/earnings to grow at ~10%/21% CAGR over FY23- 25E, respectively, and value JLL at 26x FY25 P/E.

Healthy topline growth continued

For Q4FY23, revenue grew by 13%YoY, largely aided by price growth (9.5%YoY) as volumes (+3%YoY) were impacted by high inflationary pressure. For FY23, total volume growth was only ~3% YoY. The main segment, fabric care, continued to witness a robust growth of 20% YoY (+29% in FY23), while the dishwash segment grew ~9%YoY, personal care by 11%YoY and household insecticides by 1%YoY. Going forward, strong focus on market share gains, distribution expansion, new product offerings and penetration of existing products in newer geographies will support volume growth. JLL’s direct reach has crossed 1.1mn outlets from ~0.85mn in FY21. Foray into liquid detergents and mid-price detergent powder segment have witnessed good demand. The LUP strategy (low unit packs at price point of Rs.10-contributes 30- 35% of total sales) of the company during high inflation period is working well in rural regions. With likely pickup in demand supported by declining inflation and GOI’s strong rural focus, we expect ~10% revenue CAGR over FY23-25E.

Margin improves on declining input costs…

Gross and EBITDA margins improved by 430bps YoY to 45.7% & 14.8%, respectively, due to reductions in input costs and price hikes. Raw material prices have declined but are still at higher levels compared to pre-covid levels. Margins are expected to improve further if the softness in input prices continues. However, ad spend as a percentage of sales has increased to 7.4% (from 7.2% YoY & 6.8% QoQ). The company guides its EBITDA margin to be ~15%. EBITDA grew by 59%YoY, and PAT grew by 60% YoY. The laundry business is at breakeven level and the company plans to focus on improving the topline. JLL has chosen a concessional income tax rate beginning in FY27 once the benefits under 80IE have been fully utilised (till FY26). We expect PAT growth of 21% CAGR over FY23-25E.

Valuation & Outlook

Inflation is easing, and demand is expected to improve going forward given strong rural & consumption pushes by the GoI. Expanded distribution and focus on LUP strategy will support volume growth. JLL currently trades at 1Yr Fwd P/E of 25x. We upgrade to Buy rating with a target price of Rs.245 based on 26x FY25E EPS.

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