Jyothy Labs - Facing the challenges well - ICICI Securities

Channel inventory rationalization exacerbated the weakness in some of JYL's existing categories leading to 2-year CAGR revenue decline of 2% in 4Q (adj. growth up ~3% as it implemented continuous replenishment system which had an ~8% impact on primary sales in 4Q). High margin post-wash business was impacted for most of the year; ex-post-wash FY21 revenue growth was ~6% higher (18%). Focus on rural expansion (adding sub-stockists, driving LUPs), rationalising channel inventory and continued media intensity are positive steps despite near-term challenges. Improvement in cash generation due to better working capital management (WC days improved to 21 in FY21 from the range of 38-55 days in FY16-20), if sustained, is a rerating trigger. We continue to like the potential of JYL's brands. BUY; TP Rs190.

- Adj. revenue growth of 14% in FY21: In 4Q, consolidated revenues grew 26% (volume: +24%), - 2% on a 2-year CAGR basis. Channel inventory rationalization and CRS implementation had a Rs500mn impact on primary sales for the quarter; adjusted 2-year revenue CAGR was ~3%. Margins print was subdued due to weak product mix (post-wash continued to be impacted) and inflationary RM. Dishwash continued to perform well; other segments of HI and Personal care were slightly weak.

- Focus on rural expansion and business efficiency. JYL has strengthened rural focus by (1) expanding distribution (added new sub-stockists), (2) thrust on LUPs to drive trials (expects good conversion) and (3) driving van sales. It has also increased focus on new product launches/refreshes and media spends to drive growth. Lastly, financial prudence helped (1) lower channel inventory (down to 8-10 days from 25 days) and SKU rationalisation and (2) achieve net cash position (after many years). JYL is taking technology initiatives to improve efficiency and decision making.

- Looking at multiple levers to offset RM pressure: Management indicated 5-6% inflation for its RM basket. Besides taking some price hikes, it is looking to maintain margins through other levers: (1) lower trade schemes, (2) improving product mix - revival of post-wash and higher share of LVs in HI should help and (3) calibrated portfolio-approach for price hikes.

- Valuation and risks: We fine-tune our estimates - marginal cut in EBITDA is offset by lower ETR. We model revenue / EBITDA / PAT CAGR of 10 / 12 / 17 (%) over FY21-23E. We maintain BUY with an unchanged DCF-based target price of Rs190. At our target price, the stock will trade at 23x P/E multiple Mar-23E. Key downside risks are high competitive pressure and RM inflation impacting margins.

Shares of JYOTHY LABS LTD. was last trading in BSE at Rs.150.7 as compared to the previous close of Rs. 149.1. The total number of shares traded during the day was 170403 in over 2773 trades.

The stock hit an intraday high of Rs. 154 and intraday low of 142.95. The net turnover during the day was Rs. 25628740.

Source : Equity Bulls

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