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Performance below estimates; focus on volume-driven growth

* Jyothy Laboratories (JYL) reported lower-than-expected revenue and margin in 4QFY24. Revenue grew 7% YoY to INR6.6b, led by 7% volume growth. In FY24, JYL delivered 11%/9% YoY revenue/volume growth.

* Fabric care sustained double-digit growth (10%); JYL focused on value in main-wash and expanded into new territories for the post-wash category. Dishwash growth was slow at 6%; the company focused on driving growth through LUPs. HI declined 10% YoY due to seasonality. Personal care remained the growth driver, clocking 18% YoY growth, led by Margo.

* Gross margin (GM) was up 380bp YoY to 49.5%, of which 160bp was reinvested in A&P (up 30% YoY in 4Q; up 31% in FY24). EBITDA margin improved moderately by 160bp YoY to 16.4% (470bp expansion in FY24).

* We model a 10%/11% revenue/EBITDA CAGR over FY24-26E. With a stable RM basket, we expect the EBITDA margin to sustain at 17-18%.

* We believe a large part of the GM-led earnings growth seen in FY24 will be normalized in FY25. From here on, market share gains and the success of new launches will be critical for JYL’s earnings growth. Due to its expensive valuations, we reiterate our Neutral rating on the stock with a TP of INR475 (premised on 40x FY26E P/E).

Miss on growth and margins

* Muted sales growth: JYL registered net sales growth of 7% YoY to INR6.6b (est. INR6.8b). Fabric Care/Dishwashing/Personal Care grew 10%/6%/18% YoY to INR2.8b/INR2.2b/INR0.6b revenue, while HI declined 10% YoY to INR0.7b in 4QFY24. The four-year CAGR for Fabric Care stood at 16%, Dishwash was at 15%, HI at 3%, and Personal Care was 20%.

* Miss on EBITDA margins: GM expanded ~380bp YoY to 49.5% (est. 49.2). However, as a percentage of sales, an increase in staff costs (+50bp YoY to 11%), and ad spending (+160bp YoY to 9%), as well as other expenses (+13% YoY), restricted EBITDA margin expansion to 160bp YoY (contracted 110bp QoQ) to 16.4% (est. 17.1%).

* Segmental profitability: EBIT margins in the Fabric Care/Dishwashing segments expanded 350bp/50bp to 23.0%/18.0%. Personal Care and Household Insecticides’ EBIT margins contracted 920bp/480bp YoY to 8.5%/(10.4%) during the quarter.

* APAT rose 32% YoY on higher other income: EBITDA grew 19% YoY to INR1,084m (est. of INR1,170m). PBT increased 31% YoY to INR1,072m (est. INR1,143m). Adj. PAT grew 32% YoY to INR781m (est. INR851m).

* In FY24, JYL’s net sales/EBITDA/Adj. PAT increased 11%/52%/55%.

Highlights from the management commentary

* Management expects an acceleration in volume growth driven by a good monsoon, government welfare measures, and easing inflation. The demand recovery is anticipated in rural India.

* In FY24, JYL delivered 9% volume growth. The company remained focused on volume-driven growth rather than margin expansion. Thus, reinvestment spending will remain high.

* Direct distribution reached 1.2m outlets in FY24 (vs. 1.1m in FY23) and JYL will aim to add more than 100-112k outlets in FY25. ? Capex will be INR400-500m in FY25; it will be used for media spending on the development of new categories.

Valuation and view

* There are no material changes to our EPS estimates for FY25 and FY26.

* We reiterate our Neutral rating with a TP of INR475 (based on 40x FY26E P/E) as JYL’s product portfolio is in the highly-penetrated categories, limiting future volume growth to single digit. JYL’s margin expansion beyond 17-18% is also constrained by its focus on mass and rural segments. Therefore, we believe its growth potential is adequately priced-in at its current valuation.

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