Jyothy Labs may look at price rise, reduction in trade offers to restore margins

Jyothy Labs may look at price hike in the 5 per cent range across the third and fourth quarters of this fiscal to bring margins back to last year levels.

Margins — both gross and EBITDA — have taken a 6–8 percentage point hit year-on-year (YoY), primarily on account of an increase raw material cost and increased freight and transport charges.

The second quarter results show that margins dropped in categories like fabric care (590 basis points) and personal care (1040 basis points) YoY.

Also see: Jyothy Labs Q2 profit down 27 per cent to ₹44 cr

EBITDA margin contraction was to the tune of 620 basis points to 11.6 per cent.

Gross margin fell 780 basis points YoY to 39.7 per cent.

According to Ullas Kamath, Joint Managing Director, Jyothy Labs, there has been a 12 per cent escalation in raw material cost partially mitigated through price hikes of 4–5 per cent and cost rationalisation through scale of 1-2 per cent, thereby impacting overall gross margins by 700 basis points.

Impact on margins

It is difficult to achieve an EBITDA of 16–17 per cent in the near term, Kamath added. But since some impact of the price hikes taken in the second quarter are expected to roll-over into the December quarter; margins (EBITDA) could be in the 13–14 per cent range.

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Although selective price hikes were taken in the June to August period, the full effect will likely be felt Q3 onwards (October onwards). Hikes have been primarily across select SKUs, mostly in the premium range or in large packs; whereas other margin protection measures include reduction in trade offers that are also being explored.

“If the raw material prices remain at current elevated levels, we will have to take another price hike in the five per cent range, on a weighted average basis. As of the now the raw material cost inflation is a worry and there is no immediate short-term fall in prices that we see at the moment. So there is stress on margins,” he told BusinessLine .

Price hike options

Analysts say large players generally cross-subsidize low margins offerings with another higher one within the brand, or offset absence of price hikes in highly competitive low-margin offerings with price hikes in high margin offerings. Such a lever continues to be limited for Jyothy Labs.

Also see: FMCG sector: Rural India growth slows down in Sept quarter, says Kantar

“In offerings where the company is the market leader, it can easily hike prices and others will follow. But, when it is number two or three in a segment, then it has to follow the leader in pricing. If the category leader does not take price hikes, then it will automatically become difficult for the number two to three player to up prices without sacrificing volumes. So hikes in case of Jyothy Labs needs to be calibrated or in select portfolios only,” an analyst said, requesting anonymity.

The company management in a post earnings call said it is aiming to improve its mix by selling higher margin products (personal care, and fabric care) to counter inflation. It expects market share gains in key categories which will make price hikes easier.

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