Jyothy Labs - Investment behind core brands to drive growth - ICICI Securities

Strong 2Q beat was an outcome of two factors - (1) Jyothy Labs' (JLL) execution of GTM strategy and efficient supply chain and (2) 85% of portfolio focused on hygiene (both personal and home). Seen through the category-state construct, JLL is the market leader (or a strong #2) in most categories and that should benefit in times like these. JLL's prudent business approach (continuing cash sales, controlled trade schemes) inspires confidence. We especially like the plans to increase ad-spends to invest behind core brands, driving geographic expansion while maintaining strong EBITDA margin through cost controls. Retain ADD. Stock at ~50% discount to its 10-year average P/E provides significant margin of safety.

- Volumes grew 9%: Consolidated revenue / EBITDA / recurring PAT grew 6%/ 11% / 12%. FMCG sales grew 8% driven by 9% volume growth. This strong performance was driven by a combination of (1) portfolio agility (essential and hygiene contributes ~85%), (2) strong execution (enhanced rural distribution, adding sub-stockist and LUPs in rural, new product launches, increased digital media spends) and financial prudence (cash sales, controlled trade schemes etc.).

- Segment performance: Strong performance across segments with Household Insecticides and Dish wash continuing to be the two standout performers - revenues up 23% and 24% YoY. Personal care segment revenue grew 15% and other segment (T-Shine and Maya) revenue grew 18%. On the other hand, Fabric care remained under pressure - 12% decline (-24% in Q1) due to more consumers working from home.

- Input cost benefits more than offset the inferior mix: Gross margin expanded 130bps YoY to 47.7% due to benign input cost (despite some pass through driven by price cuts in fabric wash and an inferior mix due to lower salience of fabric wash). EBITDA margin improvement was however lower at 80bps YoY to 17.3% primarily due to increase in staff costs (+20bps) and other opex (+30bps) while ad-spends were flat (as a % of sales).

- Other highlights: (1) Cash flow generation improved significantly due to good performance in 1H, improvement in working capital (-6 days) and lower capex intensity (-52%) - OCF / FCF grew by 140% / 186% to Rs2.5bn / Rs2.4bn, (2) Net debt reduced to ~Rs460mn (-76% YoY).

- Valuation and risks: We cut our FY22 earnings estimates by 2%; modelling revenue / EBITDA / PAT CAGR of 10 / 16 / 18 (%) over FY20-22E. Maintain ADD with DCF-based revised target price of Rs 150 (was Rs 160). At our target price, the stock will trade at 21x P/E multiple Sept-22E. Key downside risks are significant competition in hygiene related categories.

Shares of JYOTHY LABS LTD. was last trading in BSE at Rs.132.6 as compared to the previous close of Rs. 130.5. The total number of shares traded during the day was 52095 in over 1925 trades.

The stock hit an intraday high of Rs. 134.65 and intraday low of 128.4. The net turnover during the day was Rs. 6869844.

Source : Equity Bulls

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