Hold Jyothy Laboratories; target of Rs 115: ICICI Direct

ICICI Direct's research report on Jyothy Laboratories

Jyothy Labs (JLL) posted a disappointing set of numbers with 24% revenue & 22% volume decline as the company lost last 10 days of sales. JLL lost Rs 150 crore sales due to lockdown. Fabric care & dishwashing category revenues saw de-growth of 16.5% & 21.4%, respectively. Further decline in household insecticides (HI) & personal care category revenue was even sharper at 36% each. This was explained by the management as loss of pre-season stocking with trade channel. However, such a sharp decline in all categories seems to be more than 20-25 days sales loss, which depicts strategy of pushing inventory to trade at the end of quarter/year. Operating margins contracted 570 bps to 10.7% due to negative operating leverage as employee & other overhead cost is largely fixed. Further the company continued to incur marketing spend due to pre-commitments. Sharp decline in operating profit & other income led to the 60% decline in net profit.

Outlook

Though the company has been trying to drive growth through new product launches and increasing media spends, it is at a disadvantageous position against leaders in each category (HI, detergent, dishwashing). Hence, strong revenue growth is expected only in select geographies or sub categories. The stock is trading at 20x FY22E earnings, which is at a significant discount to other FMCG peers. However, slower revenue & earnings growth prospects justify current multiples. We maintain our HOLD recommendation on the stock with a revised target price of Rs 115/share.

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