Analyst Corner: Upgrade Jyothy Labs to ‘buy’, revised TP at Rs 190

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Input cost benefits more than offset the inferior mix.

Jyothy Labs’ (JLL) revenue grew 15% in Q3FY21, higher than the consensus expectations, driven by strong execution – penetrating rural markets, increasing throughput, recovery in MT and CSD channels (almost flat sales YoY) and significant investment behind brands (ad-spends up 40% YoY).

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. We like the continued strong performance – 10% volume growth in 9MFY21. Margin outperformance (at 17.2% in 9MFY21) versus guidance of 15-16% for FY21 provides ample room to invest behind core brands and drive geographic expansion. Upgrade to buy (from add). Stock at ~40% discount to its 10-year average P/E provides a significant margin of safety.

Volumes grew 15%: Consolidated revenue / Ebitda / recurring PAT grew 13%/ 38% / 19%. FMCG sales grew 15% driven by 15% volume growth. This strong performance was driven by a combination of portfolio agility (essential and hygiene contribute ~85%), 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.).

Exo Dishwash and Margo soap performance were good. Strong performance across segments with personal care and dish wash continuing to be the two standout performers – revenues up 48% and 21% YoY. Household Insecticide care segment revenue grew 10%, Fabric care revenue grew 2% and another segment (T- Shine and Maya) revenue grew 57%.

Input cost benefits more than offset the inferior mix. Gross margin was flattish at 47.8%. Ebitda margin expanded by 100bps YoY to 16.7% primarily due to decrease in staff costs (-70bps) and other opex (-170bps) while ad-spends increased by 170bps YoY as there was an increase to invest behind core brands.

Valuation and risks: We increase our earnings estimates by ~5%; modelling revenue / Ebitda / PAT CAGR of 11 / 16 / 21 (%) over FY20-23E. Upgrade to buy (from add) with DCF-based revised target price of Rs 190 (was Rs 180). At our target price, the stock will trade at 23x P/E multiple Mar-23E.

Key downside risks are significant competition in hygiene-related categories and input price inflation impacting margins.



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