Hold Jyothy Laboratories Ltd For Target Rs.150 - ICICI Direct
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Price hike insufficient to curb margin decline…
About the stock: Jyothy labs (JLL) is an FMCG company with a presence in fabric whiteners, detergents, dishwashing products, household insecticides (HI) & personal care products. The company has a leading brand Ujala in fabric whitener with 84.5% market share. It has a sizable dish washing & HI business with mid-teens market share. Large part of the revenue is generated from Kerala & Tamil Nadu.
* The company has 23 manufacturing facilities in India. Its pan-India distribution reach is close to 2.8 million outlets with direct reach of 1.1 million. Its major brands include Ujala & Henko in Fabric wash, Exo & Pril, in dishwashing, Margo in soaps & Maxo in HI categories
Q3FY22 Results: JLL posted dismal result with 555 bps dip in operating margin.
* Sales were up 12.6% YoY, aided by 7% volume growth
* EBITDA was at | 60.5 crore, down 24.2% YoY, with margins at 11.4%
* Consequent PAT was at | 35.4 crore (down 32.2 % YoY)
What should investors do? JLL’s share price has underperformed the FMCG index with negative 22% return (from | 178 in January 2017 to 140 in January 2022).
* We cut our FY22E & FY23E earnings estimate by 14% & 6%, respectively
* We continue to maintain our HOLD rating on the stock
Target Price and Valuation: We value the stock at | 150, valuing the business at 22x FY24 earnings.
Key triggers for future price performance:
* High commodity prices continue to adversely impact gross margins. Price hikes not sufficient to protect gross margins; marketing spends require volume growth
* Strong growth momentum to continue in dishwashing with expected market share gains with distribution expansion
* Increasing proportion of liquid vaporisers to turn HI segment profitable
Alternate Stock Idea: We like TCPL in our FMCG coverage.
* Strong innovation & premiumisation strategy in salt, tea, Sampaan & Soulful in the Indian market are expected to drive sales & margins
* We value the stock at | 910 with a BUY rating
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