Stock Fundamentals

Jyothy Laboratories: A clean, new look

Parvatha Vardhini C | Updated on March 03, 2019 Published on March 02, 2019

Pick-up in rural demand and launches are positives for the company

The carnage in mid- and small-cap stocks in the last one year has not spared Jyothy Laboratories (JLL). While the stock did well in the first half of 2018 to touch its one-year high of ₹241 in early July, this mid-cap FMCG player has dropped 25 per cent since then. With the company having a strong presence in Kerala for some of its products, floods in the State last year took a toll on investor sentiments. However, this fall is a good entry point for long-term investors.

Despite headwinds for big-ticket consumer segments such as automobiles and durables, small-ticket consumption is on an uptick. JLL will be a beneficiary of this trend. Rural demand that is growing faster than urban, as well as a host of launches bode well for the company’s volume growth.

Besides, focus on premiumisation and natural products, given the growing consumer interest in these segments, is an added positive.

After the fall in price, the valuation seems attractive. JLL trades at 30 times its trailing 12-month earnings, at a good discount to FMCG industry behemoths such Hindustan Unilever, Dabur and Marico (over 50 times trailing earnings).

Recovery in sales

JLL operates mainly in the fabric care (Ujala, Henko), dishwash (Exo, Pril), personal care (Fa, Margo) and household insecticides (Maxo) segments.

Fabric care brings in 40-45 per cent of the revenue and dishwash 35 per cent. The other two segments chip in with about 10 per cent each.

JLL was quick to come out of the impact of demonetisation and GST. While volumes in the June 2017 quarter dropped sharply by about 18 per cent due to the GST transition, the company bounced back with volume growth increasing steadily over the next four quarters to 18.5 per cent by June 2018.

With Kerala being an important market for the company, the unprecedented floods last year dented sales for JLL during the second quarter ending September 2018.

However, the company is on the recovery path. In the quarter ended December 2017, the overall volume growth came in at 6.1 per cent, with good traction in almost all segments.

Growth drivers

In the quarters to come, JLL is well-placed to deliver higher volumes. For one, although pockets of farm distress exist, rural sales for all FMCG companies have been growing faster than in urban centres in the last few quarters, and JLL is no exception.

Various measures announced in the Budget to boost farmer incomes will help lift consumption of small-ticket consumer items.

Rural sales contribute 30-40 per cent of revenue for JLL. Besides, moves to put more money in the hands of the unorganised sector workers and the middle-income group will give a leg-up to urban consumption.

Low inflation and consequent cuts in borrowing costs by banks will also increase disposable income.

To improve profitability, the company is focused on increasing the penetration of its premium products through an array of launches and refurbishments. In the last few months, it introduced lower-priced packs (₹10) of its premium detergent, Henko.

Also, Henko Matic (used for washing machines) and Henko Stain Care have been refurbished and relaunched.

It has also brought out two new premium variants of Ujala Crisp & Shine.

A new ‘Tamarind’ variant of its premium dish wash Pril has been introduced recently, while the Maxo Genius (mosquito repellent) has also been relaunched.

With increasing customer preference for ayurvedic and natural products, the company has also made inroads into this space.

The Maxo Agarbathi (mosquito repellent), which was introduced sometime back, is doing well now. T-Shine, a completely organic toilet cleaner, is now being test-marketed in Kerala.

Financials

For the nine months ended December 2018, net sales grew by about 10 per cent over the same period in 2017 to ₹1,265 crore, while net profit grew by a healthy 26 per cent to ₹126 crore. The bottomline growth was helped by higher growth at the operating level and lower interest costs.

Operating margin expanded from 15.3 per cent last year to 16.1 per cent now.

The company aims to grow its revenue by 12-14 per cent for 2018-19.

Given the healthy growth outlook, this should not be difficult.

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