What makes the stock of Jyothy Labs a good bet?

Amid the Covid-19-induced lockdown and its after-effects, a foothold in the rural market and presence in the in-demand personal hygiene and homecare segments helped Jyothy Labs tide over the challenging June 2020 quarter, with a volume growth of 6 per cent y-o-y.

The company has seen good traction in offtake in July as well.

With the country slowly inching back to normalcy in the unlock phase, consumer spending is picking up, with even sale of big-ticket consumption items such as automobiles showing encouraging signs. Jyothy Labs will continue to be a beneficiary of consumer inclination towards hygiene, a segment in which the company has launched new products in the last few months. A revival in household insecticides demand, after a lull, also helps.

Over the medium to long term, focus on premiumisation and natural products, given the growing consumer interest in these segments, is another positive.

Investors with a one- to two-year perspective can buy the Jyothy Labs stock. At the current price, it trades at 30 times its trailing 12-month earnings. Considering that it is a mid-cap stock, the valuation is at a good discount to bigger players such as Marico, Britannia, Dabur and Hindustan Unilever, which trade at 42-68 times.

Growth drivers

Jyothy operates mainly in the fabric care (Ujala, Henko), dishwash (Exo, Pril), personal care (Fa, Margo) and household insecticides (Maxo) segments. Fabric care and dishwash each bring in about 35 per cent of the revenues. The other two segments chip in with about 15 per cent each.

Rural sales account for around 40 per cent of the revenues.

Prior to the lockdown and in the scramble for essentials, Jyothy Labs distinguished itself in the segments it operates in by focussing on pockets with low penetration such as premium detergents/post-wash products in fabric care, liquid dishwash and liquid repellents.

As the lockdown forced consumers to move towards essentials (mainly food) and hygiene products, the fabric care segment took a hit, with segmental revenues falling 17 per cent year-on-year and 25 per cent year-on-year in the March and June quarters, respectively.

However, three factors have helped Jyothy Labs handle the Covid-induced slowdown. One, it focussed on improving its sales in hygiene products across categories such as home care (dishwash, toilet and floor cleaners) and personal care ( hand wash, hand sanitiser). The company launched the organic T-Shine toilet and floor cleaner as well as Margo hand sanitiser and handwash during this period.

Existing products such as Exo and Pril dishwash also saw good off-take as the use of utensils increased at home during the lockdown. These trends will continue to drive sales in the near term, too.

Two, the 40 per cent rural contribution to revenues is also aiding the volume growth. Consumer goods — be it FMCG items or two-wheelers, tractors and cars — are a seeing good demand in rural India. Besides, lower-priced packs (₹5 and ₹10) across brands such as Margo, Exo and Henko is aiding penetration of products in rural and semi-urban areas, resulting in higher volumes.

With general trade doing better than modern trade during the lockdown, Jyothy Labs added more sub-stockists as part of its strategy to improve sales in rural market. These factors are driving rural volumes.

Three, sales in the household insecticide segment bounced back for Jyothy Labs in the June quarter. In the quarters even before Covid, both Godrej Consumer Products and Jyothy Labs were facing stiff competition in its mosquito coils segment from spurious imported incense sticks (repellents).

The Centre’s restrictions on these imports late last year were a relief. Besides, the pandemic has also heightened the fear of illnesses induced by mosquito bites. In the quarter ended June 2020, revenues in the household insecticide segment more than doubled, over the same period last year, aided both by a low base as well as Covid-induced fear.

Liquid vapourisers, traditionally a smaller segment for Jyothy Labs in comparison with coils, have seen good off-takes. It being the rainy/winter season, the third and fourth quarters are also usually stronger for household insecticides.

While near-term prospects seem sanguine due to the above-mentioned reasons, in the medium term, the focus on under-penetrated segments such as liquid fabric wash and post-wash products as also liquid dish wash and repellents will help. Jyothy Lab’s strategy of improving penetration through low-unit price packs provides a good opportunity to convert such buyers into customers for their full-price products. These smaller packs now bring in 25-30 per cent of the revenues.

Financials

In the three months ended June 2020, net sales grew by 4 per cent (y-o-y) to ₹428.7 crore and adjusted profit, by 30 per cent (y-o-y) to ₹50.4 crore. Operating margin expanded to 18.2 per cent from 15 per cent in the June 2019 quarter, thanks to benign input prices as well as cost-control efforts.

Advertising expenses as a percentage of sales came in at 4.6 per cent, much lower than the 8 per cent levels seen a year ago. Below the operating level, lower interest costs and flat depreciation costs also aided profit growth. Increased focus on volumes through low-unit price packs may impact margins if input prices or ad spends increase.

Also, with all FMCG companies coming out with hygiene products in the personal and homecare space, Jyothy Labs faces stiff competition from bigger peers.

This may also impact product pricing and margins. Cost control will be key then.