Sell Jyothy Labs Ltd For Target Rs.405 - Geojit Financial Services
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Robust performance at higher valuation
Jyothy Labs Ltd. (JLL) is an Indian FMCG player with products across fabric care, dishwashing, mosquito repellents & personal care
, dishwashing, mosquito repellents & personal care.
* We revise our target price to Rs.405 (from Rs. 290), considering healthy topline growth & strong margins, but maintain our SELL rating due to sharp increase in valuation.
* For Q2FY24, revenue grew by 11%YoY (consistent double-digit growth in the last 12 quarters), mainly driven by volume. While main segments, fabric care and dishwash (78% of total sales) grew by ~11% YoY each, personal care grew by 22% and household insecticides by ~3% YoY.
* Operating profit grew by robust 68%YoY, aided by 870bps YoY improvement in gross margin to 49% due to lower input costs. EBITDA margin improved by 630bps YoY to 18.5% despite higher ad spend.
* JLL prioritizes volume driven growth by expanding its distribution reach and market share along with rural penetration through LUP (lower unit pack) strategy.
* The company guides for 16%-17% EBITDA margin for FY24. We expect revenue/earnings to grow at ~11%/32% CAGR over FY23-25E, RoE to improve to 21% (15.6% in FY23), value JLL at 37x FY25 P/E.
Healthy topline growth continued
For Q2FY24, revenue grew by 11%YoY, mainly aided by volume growth of ~9%YoY, while price growth was at 2%YoY. The main segments, fabric care and dishwash (78% of total sales), witnessed healthy growth of ~11% YoY, while personal care grew by 22%YoY and household insecticides by 3%YoY. Going forward, a strong focus on distribution expansion, market share gains, new product offerings, and penetration of existing products in newer geographies will support volume growth. JLL’s direct reach has crossed 1.1mn outlets from ~0.85mn in FY21. Forays into liquid detergents and the mid-priced detergent powder segment have witnessed good demand. The LUP strategy (low unit packs at a price point of Rs.10-contributes 25-30% of total sales) of the company is working well in rural regions. Declining inflation along with GOI’s strong rural focus will support demand. We expect ~11% revenue CAGR over FY23- 25E.
Strong margin improvement on lower input costs…
Gross margin improved by 870bps YoY to 49% due to reductions in input costs and growth in realisation while EBITDA margin improved by 630bps to 18.5%, despite increase in ad-spend (7.8% of sales vs. 6.3% YoY). EBITDA grew by robust 68%YoY, while PAT grew by 81% YoY aided by higher other income and lower interest cost. Input prices have declined materially from their peaks but is witnessing some volatility in recent months. The company has guided EBITDA margin to be ~16-17% for FY24. JLL has chosen a concessional income tax rate beginning in FY27 once the benefits under 80IE have been fully utilised (till FY26). We expect PAT growth of ~32% CAGR over FY23-25E.
Valuation & Outlook
Easing inflation, along with strong rural & consumption pushes by the GoI will aid demand. Expanded distribution and a focus on the LUP strategy will support JLL’s volume growth. We revise our target price to Rs.405 (from Rs. 291), valuing at 37x FY25E EPS, considering the strong margins and healthy volumes. However, we maintain our SELL rating due to sharp increase in valuation (JLL currently trades at 1Yr Fwd P/E of 43x vs. 10Yr avg of 28x).
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SEBI Registration Number: INH200000345
