Jyothy Laboratories – Well-groomed; Buy
Key takeaways from management interaction
Volume upturn, overall. During 1HFY15, Jyothy Labs reported robust, 16% yoy, revenue growth through a mix of volume growth (8%) and price hikes (8%) driven by fabric care, dishwashes and personal care. Delayed offtake due to a volatile season saw lower volume growth in mosquito repellents. We believe the focused approach on building up the detergents and personal-care sub-categories would drive volumes in coming years and, with the launch of the Ujala liquid sachet, we are upbeat concerning category growth. In addition, we expect the continuing thrust on Margo and Henko, backed by wider retail distribution, to see strong double-digit volume growth. The recent launch of Exo liquid may create new sub-categories in dishwashes.
Benign raw material prices to improve profitability. Though the gross margin contracted 40bps yoy in 1HFY15 because of higher input prices, the recent steep slide in crude oil prices and downward trend in LAB and palm oil may improve it 70-100bps further. We do not expect much increase in A&P spending as the management is confident and does not expect any pressure from competition for it to require to spend more in any category for this purpose. The company still enjoys MAT benefits and much lower interest cost; hence, we have factored in strong, 60%, PAT growth in FY15.
Revised estimates. Mounting inflation has led to lower volume growth in the consumer sector in 1HFY15. However, we believe offtake will improve in the second half of the year. It is evident that, because of the delayed winter, volumes may spill over to 4QFY15. We have revised our FY15 and FY16 revenue, EBITDA and PAT estimates, and introduced FY17 estimates.
Our take. We value the stock at a target price of `300. Over FY15-17 and maintain Buy, we expect 23% and 27% CAGRs in, respectively, revenue and PAT. At the current market price, the stock quotes at 26x FY16e and 20x FY17e. Risks. Higher raw-material prices and increase in competitive intensity in soaps and detergents.