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Weak results trend persists; material costs to weigh on margins

* Jyothy Laboratories (JYL)’s 1QFY22 sales came in above expectations, despite a higher COVID impact in the company’s largest market, i.e., Kerala. Nevertheless, gross and EBITDA margins were significantly lower than expectations due to a higher material cost impact and higher-thananticipated ad spends. Material cost inflation is unlikely to see any considerable respite, affecting performance in subsequent quarters as well.

* While improvement was seen in net WC days in FY21 and the company is now net debt free, topline growth is key for a company with sales of just INR19b. The likelihood of 15% sales growth (essential for any re-rating) continues to appear difficult. The sales CAGR has been 3.7% for the preceding five years.

* With margins likely to remain under pressure due to material cost increases, earnings growth prospects remain weak. Maintain Neutral.

Double-digit volume growth benefit; high input cost impacts profitability

* Standalone net sales grew 21.8% YoY to ~INR5.2b in 1QFY22 (est. INR4.8b).

* Gross margins contracted ~280bp YoY to 43.1% in 1QFY22. High RM cost YoY as a percentage of sales (+280bp YoY), high ad spends at 8.2% (+360bp), marginally lower staff costs at 11.7% (-30bp), and lower other expenses at 10.8% (-30bp) led to EBITDA margin contraction of 580bp YoY to 12.5%.

* EBITDA declined ~17% YoY to INR650m (est. INR 787m). PBT declined ~19% YoY to INR476m (est. INR626m). Adj. PAT declined 20.5% YoY to INR401m (est. INR514m).

* The two-year average quarterly sales / EBITDA / adj. PAT growth stood at 13%/1.2%/10%.

* Consolidated segmental performance: Fabric Care / Dishwashing / Household Insecticides / Personal Care grew ~27%/22%/13%/13.5% YoY to INR1.8b/INR1.9b/INR718m/INR680m in 1QFY22.

* Margins for Fabric Care / Dishwashing / Household Insecticides / Personal Care contracated by 460bp/-940bp/+215bp/-730bp YoY and stood at17.6%/11.3%/(0.9)%/18.2%.

Highlights from management commentary

* The second COVID wave impacted JYL’s service and distribution activities. However, no major disruption was seen due to adequate stock maintained in the pipeline.

* Strong overall double-digit growth resulted in market share gains across categories.

* The General Trade (GT) and e-commerce channels led growth, with ecommerce now contributing ~4% to total sales. Modern Trade (MT) and Canteen Stores Department (CSD) remained weak further weighing down detergent sales recovery

* Weighted inflation in the key RM basket was ~10%. MRP increase, reduction in trade schemes, and enhancing manufacturing efficiencies helped to offset 70% of RM inflation cost

* The management has guided to achieve EBITDA margins of 17–18% once the current volatile scenario returns to normal.

Valuation and view

* We lower our FY22E/FY23E EPS by 8.9%/1.3% due to a tepid sales growth outlook and rising material costs.

* For a company that has a far lower sales base of INR19.1b in FY21 (v/s peers), its performance over the past five years has been consistently lackluster (at 3.7%/7.2% sales/operating profit CAGR).

* RoCE at 15% in FY21 remains far inferior v/s peers. No marked uptick is visible over the medium- to long-term horizon. We maintain our 16x EV/EBITDA target multiple (~50% discount to peers) even as we roll forward to September 2023 targets, resulting in TP of INR168 per share. Maintain Neutral.

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