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Healthy volumes, margin pressure in the near-term

Jyothy Laboratories Ltd (JLL) is an Indian FMCG player with products across Fabric care, Dishwashing, Mosquito repellents & Personal Care.

* We revised down our target to Rs165 (from Rs.190) due to short-term pressure on margins but maintain Accumulate rating given healthy topline growth, and recent correction in stock price.

* Q3FY22 revenue grew by 13%YoY (2Yr cagr of 13% from pre-covid period), aided by volume growth (+7% YoY) and price hike.

* Growth was healthy across all major segments, Fabric care (19%YoY), Dishwash (11%), and Household Insecticides at 10%YoY. Personal care growth was flat YoY on a very high base (+48% in Q3FY21).

* Improved mobility in urban areas aided improvement in Modern Trade (MT) channel and Canteen Stores Department (CSD) sales. However, resurgence of Covid cases may impact footfalls in the short-term.

* EBITDA margin declined by 540bps YoY to 11.3% (Vs.11.4% in Q2FY22 & 12% in Q1FY22) due to 710bps reduction in Gross margin on account of sharp increase in input prices. Some input prices have peaked out, but some are still at higher levels.

* We factor revenue/earnings to grow at ~12%/13% CAGR over FY21-24E and value JLL at 24x FY23 P/E.

Healthy growth across segments.

For Q3FY22, revenue grew by 13%YoY (Volumes +7% YoY). backed by healthy growth across all major categories. Fabric Care & Dishwash segments growth were healthy at 19% & 11% YoY on account of opening of economy and increased mobility. Personal care growth was flat YoY due to very high base (+48% in Q3FY21) while Household Insecticides grew by 10% YoY. Modern Trade and Canteen Stores Department (CSD) which were impacted the most during covid period, came back to pre-covid levels but the recent increase in restrictions due to resurgence of Covid cases impacting footfalls. Rural demand will be supported by good monsoon and GOI’s strong rural focus. The company is taking steps to increase retail, distribution, and direct reach outlets which crossed 1mn reach Vs 0.8mn earlier. JLL has added 500 sub-stockists during last year. We expect ~12% revenue CAGR over FY21-24E.

Margin pressure remains due to sharp surge in input prices

EBITDA margin declined by 540bps YoY to 11.3% mainly due to 710bps reduction in gross margins on account of sharp increase in input prices. This was partially managed by price hike and cost rationalization. Against ~14% inflation in raw material basket the company has taken ~8% price hike. Some input prices have peaked out, but some are still at higher levels. JLL would take price hike further if the input price inflation continues. Ad spend was Rs.38cr (~7.1% of sales) Vs Rs.35cr YoY (7.4% of sales) and annual guidance is at ~7.5% of sales. The company aims to increase revenue contribution from personal care in the coming years to enhance margins further. JLL has opted for concessional income tax rate from FY27 onwards once the benefits under 80IE are utilised (till FY26). We expect PAT growth of 13% CAGR over FY21-24E.

Valuation & Outlook

Margin pressure is likely to remain in the short-term as the inflationary environment exits. JLL focuses on volume led growth by taking calibrated price hkes and cost reduction measures. Give JLL’s essential & hygiene products and focus on increasing distribution reach will support volumes going forward. We expect the sharp surge in input prices to normalise in FY23. We maintain Accumulate rating considering recent correction in the stock price with a revised Target of Rs.165 (earlier Rs.190) based on 24x FY23E EPS.

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