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Expect subdued EBITDA growth in 3Q even while volume growth improves

We recently met the management of Jyothy Laboratories Ltd. (JYL). Management reemphasized about the soft demand environment & pressure on margins in the near-term. Beyond the next few quarters, JYL is confident of improving its growth trajectory with high-single digit volumes supported by come-back of pricing, premiumization and addition of category next year. Maintain BUY with unchanged target price (TP) of Rs500.

Near-term comments

Soft consumer demand visible especially in the general trade channel stays in the near-term. It continues to expect mid-to-high single volume growth in 3QFY25. To combat inflation, JYL has already implemented grammage reduction in select SKU’s in the current quarter. Price increases are also anticipated in soaps portfolio at the end of 3QFY25.

Direct reach improvement – key reason for growth enhancement

Direct reach improvement has been one of key reasons for improvement in its growth trajectory leading to better throughputs per store. JYL’s direct reach now stands at 1.2- 1.3mn outlets, which is almost 35-40% of its overall reach. After Ujala, Exo has helped in the reach expansion of rest of portfolio. There are still portfolios within the business which are regional, for e.g., Ujala IDD and Ujala Crisp & Shine are largely present in South India.

Driving premiumization across lower price points now within detergents

Detergents continue to see premiumization (to liquids) led growth driven by increase in washing machine penetration, issue related to powder patches and better fragrance retention through liquids. Matic powder category for the industry is not growing while liquid is growing 40-50%. JYL initially started with liquids in the premium segment but now through More Light and Mr. White, it intends to play the premiumization story in lower price points as well. Margo portfolio has done well in recent years, but the management is aware of the fact that the brands growth is restricted to consumers preferring a particular ingredient. Thus, going forward JYL aims to utilize the brand equity of Margo to venture into new formats and categories. Within the Household Insecticides (HI) category, JYL has experienced a consumer shift towards incense sticks, affecting Maxo Coil sales. It continues to focus on liquid vaporizers (LV’s) and convert the mix within HI in favour of LVs over the medium-term.

Product development

After successful introduction of the 5-litre bulk pack of More Light liquid detergent, JYL also introduced Mr. White liquid detergent in key markets in October 2024. JYL remains committed about introduction of new category next year leveraging its current distribution set-up. It aims to use third-party manufacturers in the initial phase of the new category. This will bring the mix of in-house manufacturing below 95%.

Margin to remain under pressure in the very near-term

Management has maintained it EBITDA margin guidance of 16-17% in FY25 as 2HFY25 margins will be under pressure due to higher brand investments and inflation in key inputs.

View and Valuation

Our medium-term view is pinned on the following arguments: (1) Sticking to broader strategy which over last 3 years has helped deliver superior revenue growth. (2) Distribution improvement and focus on rural markets should help sustain growth. (3) Ongoing portfolio rebalancing aimed at reducing dependence on Fabric Care (FC) & Dishwashing over mediumto-long term. (4) Cost optimization, operating leverage, loss reduction in Household Insecticides (HI) and Personal Care (PC) profitability reverting to earlier levels should aid margins over the next 3-5 years. Growth rate should pick up starting next quarter but might not see market leading double-digit growth. With minor changes in our estimates, we now build revenue, EBITDA and APAT CAGR of 9.1%, 11.5% and 11.2%, respectively. The stock is currently trading at ~39x/33x/30x FY25E/ FY26E/ FY27E EPS. Due to valuation comfort, we maintain our BUY rating and an unchanged TP of Rs500 (targeting ~36x FY’2027E EPS). Reclaiming double-digit growth and details around new category are key to re-rating.

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