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Material cost pressures continue; gaining market share

* Jyothy Laboratories (JYL)’s 1QFY23 revenue was in line with our estimate. Elevated commodity costs kept gross margin under pressure. The adverse impact was reflected in EBITDA margin, which stood at 10.2% (est. 12.5%).

* Revenue CAGR has been tepid at 5.5% over the preceding five years ended FY22. Revenue growth is the key for a company with sales of only ~INR22b. The likelihood of a consistent 15% sales growth (essential for any re-rating) continues to appear difficult, despite JYL’s efforts to ramp up its total and direct reach.

* With margin likely to remain under pressure due to elevated material cost, its earnings growth prospects remain challenging. We assign a 15x EV/EBITDA target multiple as we roll forward our Jun’24E targets, resulting in a TP of INR160. We maintain our Neutral rating.

In-line sales; EBITDA significantly below estimates

* JYL’s standalone net sales grew 12.2% YoY to ~INR5.9b (est. INR5.8b).

* EBITDA declined 8% YoY to INR598m (est. of INR728m).

* PBT grew 28.6% YoY to INR612m (est. INR545m) on account of higher other income, which came in at INR139m v/s INR48m YoY.

* Adj. PAT grew 30.2% YoY to INR522m (est. INR460m).

* Gross margin contracted 420bp YoY (-120bp QoQ) to 38.9%. As a % of sales, lower ad spends at 7.6% (-60bp YoY), lower staff costs at 10.2% (-150bp YoY) and slightly higher other expenses at 10.9% (+20bp YoY) restricted EBITDA margin contraction at 230bp YoY to 10.6%.

* Consolidated segmental performance: Fabric Care/Dishwashing/ Household Insecticides/Personal Care grew ~39%/16%/21%/5% YoY to INR2.5b/INR2.1b/INR448m/INR694m in 1QFY23, respectively.

* Margins in the Fabric Care/Household Insecticides/Personal Care segment contracted 530bp/900bp/1,470bpYoY to 12.3%/(10.0%)/3.6%, respectively, while expanded 180bp to 13.2% in Dishwashing segment.

Highlights from the management commentary

* Capacity utilisation was at 65% (back to pre-Covid levels).

* It is consistently increasing market share across the brands.

* Both Rural and Urban recorded positive volume growth during 1QFY23.

* Key RM: Naphtha, soda ash and palm oil accounted for two-thirds of RM in entire product portfolio and have seen a steep price increase YoY.

* Other income was higher due to profit of INR88m from the sale of Bhubaneswar facility.

Valuation and view

* We cut our FY23E EPS by 1.4% led by continued material cost pressure. However, we raise our FY24E EPS by 4.4%.

* For a company that has a far lower sales base of INR21.9b in FY22 (v/s its peers), the performance over the past five years has been consistently lackluster (at 5.5%/-0.5% sales/operating profit CAGR, respectively).

* RoCE at 11% in FY22 remained far inferior to its peers. No marked uptick is visible over the medium- to long-term. We assign a 15x EV/EBITDA target multiple as we roll forward our Jun’24E targets, resulting in a TP of INR160. We maintain our Neutral rating.

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