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Trade pipeline rationalisation dents volume growth

Jyothy Labs reported 27.2% revenue growth in Q4FY21 led by strong growth in dishwashing, household insecticides & personal care segment. However, the number is still disappointing considering the base quarter saw 24% topline de-growth. The company rationalised trade inventory pipeline by 10 days, impacting sales by 8-10%. Dish washing segment saw 33.2% sales growth led by continued trend of higher home cooking & increased usage of trusted dishwashing brands. HI & personal care segment saw 35.8% & 38.4% growth, respectively, due to similar sales decline in base quarter. Fabric wash grew at a slower pace of 15.8% given post-wash category continued to stay impacted by out of home activity (schools, offices are affected by pandemic). Gross margins remained at similar levels despite a sharp increase in crude based raw materials. However, with savings of 122 bps in employee spends, 121 bps savings in marketing spends & 95 bps savings in other overhead spends, operating margins expanded 368 bps to 14.3%. Operating profit grew 71.2% to | 69.8 crore. The high growth was mainly due to sharp contraction in operating margins in the base quarter. PAT grew 1.1% to | 27 crore with | 23.5 crore exceptional expense due to reversal on write back of excise duties of previous years. After excluding one-off expense, PAT grew 89.2% to | 50.5 crore.

Enhancing distribution network; rationalisation trade pipelines

JLL is enhancing its rural distribution network by adding 500 sub-stockists in FY21. Moreover, it is also concentrating on increasing van coverage in rural India to drive penetration & frequency of consumption. In urban regions, it has increased its direct distribution reach to ~9 lakh retail outlets. Moreover, the company has also rationalised trade pipeline by 10 days after implementing continuous replenishment system (CRS). We believe distribution upgradation & expansion would drive growth in dishwashing category for the company. We estimate 9.3% revenue CAGR in FY21-23.

Recovery in post wash to expand margins

Fabric wash category has been adversely impacted in FY21 given reduced out of home activity resulted in lower usage of detergent & post wash products. It is important to note that fabric wash remains a high margins business for the company & normalisation of situation after the vaccination would boost fabric wash revenue and, in turn, aid margins. We estimate 80 bps improvement in operating margins to 17.6% in FY23E.

Valuation & Outlook

JLL has seen strong profitable growth in dishwashing & personal care segment. However, growth in fabric wash remained dismal (reduced out of home activity) & profitability in HI has been muted due to high proportionate sales of coil. We believe revenue growth possibilities are restricted considering all categories are highly penetrated moreover, presence of large competitors would also limit scope for margin expansion. We maintain our HOLD rating with a revised target price of | 160/share (earlier | 175).

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