Stock call. Why Jyothy Labs is a buy

Amid the ongoing slowdown, big-ticket consumer segments such as automobiles have seen sales volumes plunge in the past two quarters. Consumer staples, in comparison, are on a better wicket.

Among companies in this space, Jyothy Labs has had a good first half, with volumes growing by 5.6 per cent in the June 2019 quarter and by 8.3 per cent in the three months ended September 2019. While niche products in categories such as homecare, dishwash and personal care have helped urban sales grow, rural demand has been kept afloat by offerings in low unit price packs.

Household insecticides (HI), which has seen a prolonged de-growth, is also expected to do better in the months to come. Focus on premiumisation and natural products, given the growing consumer interest in these segments, is an added positive.

Investors with a one- to two-year perspective can buy the Jyothy Labs stock. At the current price, it trades at 32 times its trailing 12-month earnings which is at a discount to its three-year average valuation of about 39 times. Considering that it is a mid-cap stock, the valuation is at a good discount to bigger players such as Hindustan Unilever, Britannia, Marico and Dabur which trade at 38-65 times.

Growth drivers

Jyothy operates mainly in the fabric care (Ujala, Henko), dishwash (Exo, Pril), personal care (Fa, Margo) and HI (Maxo) segments. Fabric care brings in 40 per cent of the revenues and dishwash 30-35 per cent.

The other two segments chip in with 10-12 per cent each. Rural sales bring in 40 per cent of the revenues.

Jyothy has been able to ride out the slowdown by focussing on pockets with low penetration such as post-wash products in fabric care, liquid dishwash and liquid repellents, as well as natural and premium products.

Thus, in the crowded fabric wash space, Ujala Crisp and Shine, a fabric stiffener, and premium detergent Henko are helping growth. Ujala Crisp and Shine, currently being marketed in Tamil Nadu and Kerala, has seen about 23 per cent growth in sales in the first half of this fiscal.

These will now be launched Karnataka as well. To further cash in on the trend of liquid dishwash, growing faster than bars (1.5 times), a tamarind variant of Pril was launched recently. Lower-priced packs (₹10) of Henko as well as low-unit packs of the Exo dishwash bar and Pril Tamarind (₹20) have aided penetration of premium products in rural and semi-urban areas as well as conversion of prospective customers, resulting in higher volumes. In soaps, another highly penetrated category, the positioning of Margo as a niche natural product has also paid off.

Despite price cuts taken by other players in this category, the company was able to hold its ground, seeing a 10.1 per cent sales growth in the first half of this fiscal. In the homecare space, T-Shine, a completely organic toilet cleaner, is now being test-marketed in Kerala.

Recovery hope in insecticides

The fact that the HI segment might be seeing some recovery in the second half of this year is another positive for the company. While liquid vapourisers have seen good growth in the first half of this fiscal, overall sales in the HI segment shrunk 9.2 per cent year-on-year due to a sharp de-growth in coils.

Coils bring in two-thirds of the HI segment revenues for Jyothy. Both Godrej Consumer Products and Jyothy Labs have been facing stiff competition in its mosquito coils segment from spurious imported incense sticks ( repellents) in the past few quarters.

The Centre recently placed restrictions on these imports; this should aid growth in coils in the coming months. Also, being the rainy /winter season, the third and fourth quarters are usually stronger for HIs.

Financials

For the six months ended September 2019, the firm’s net sales grew 5.5 per cent over the same period in 2018 to ₹876 crore, while adjusted profits grew by a healthy 18.7 per cent to ₹92.3 crore. The operating margin expanded from 15.8 per cent last year to 16.1 per cent now.

The bottom-line growth was helped by lower interest and depreciation costs. Given that its effective tax rate is below the reduced rate of 25.17 per cent announced recently, the company will not shift to the new regime as of now.

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