Double-digit volume growth, 18 per cent EBITDA margin and a healthy 17 per cent year-on-year growth in adjusted net profits, saw the Jyothy Labs stock shoot up over 7 per cent last Thursday, when the company announced its Q1 results.

At a time when industry leaders such as HUL have been struggling with low volumes, Jyothy Labs has clocked 7 to 11 per cent volume growth in the last five quarters. The market, too, has taken cognizance of this.

From our earlier ‘accumulate’ call in August 2023 at ₹322, the stock has jumped over 70 per cent. The stock’s one-year return is close to 80 per cent, outperforming most constituents of the Nifty FMCG Index as well as the index’s own 19 per cent return in this period by a wide margin.

Thanks to good volumes as well as healthy profit growth, Jyothy has seen a strong re-rating, with its trailing 12-month PE expanding from 31 times a year ago to 54 times now. In comparison, bigger competitors such as Marico, Dabur and HUL trade at 59-63 times.

With rural consumption showing a pick-up and the company focusing on premiumisation and improving penetration, prospects seem good. However, investors can book partial profits and take at least some money off the table, for two reasons. One, as against the high-growth phase of the last two fiscals, earnings growth is expected to moderate, going forward. While the stock now trades at 48.4 times FY25 earnings as per Bloomberg consensus, earnings CAGR over FY25-26 is expected at 14.85 per cent.

Two, the current margins of 18 per cent may well be the peak. FY24 saw a 5-percentage point rise in margins over FY23 thanks to the collapse of commodity prices. With the base effect catching up, this benefit may not accrue.

Besides, the healthy volume growth in four of the last five quarters was helped by price cuts to partially pass on the lower costs. Jyothy’s volume growth will be put to test when input prices stabilise/move up. Whether rising advertising spends contribute to volumes and the margins also see the benefit of operating leverage from the latter, will need to be watched.

Segments and strategy

Jyothy operates mainly in the fabric care (eg. Ujala, Henko), dishwash (eg. Exo, Pril), personal care (eg. Margo) and household insecticides (eg. Maxo) segments. Fabric care and dishwash are the major ones, together bringing 76 per cent of the revenues.

To gain market share and grow in these segments, Jyothy has been following a three-pronged strategy: premiumisation of its product portfolio through introduction of liquid detergents/dishwash, across brands and post-wash fabric care products, improving penetration through launch of low unit-price packs at one end, as well as value offerings in the bulk/e-commerce segments at another, and expanding its direct reach and network of stockists.

These efforts have shown results, with the fabric-care segment margins expanding from 16.3 per cent in FY23 to 24.2 per cent in FY24 and further to 24.9 per cent in the June 2024 quarter. Ditto with the dishwash segment where margins now stand at 20 per cent vs. 15.3 per cent in FY23. However, the smaller segments — household insecticides (HI) and personal care — aren’t seeing much benefit yet from the push.

Household insecticides (7 per cent of revenues) continues to be its Achilles heel, as is the case with even bigger players such as Godrej Consumer. This segment continues to make losses for the company, even as it focuses on the higher-margin liquid vaporisers over coils.

Margins in personal care — which is usually the most profitable segment in the industry — are just at 10-12 per cent for Jyothy in FY23, FY24 as well as Q1FY25, as the company has been investing heavily in the brands in this segment. Jyothy’s earnings will continue to ride on the detergents and dishwash segments in the near term. Risks from a rise in input prices, limited pricing power and the need to trim down ad spends as a consequence (impacting volumes) remain.

Why
Sharp run-up since earlier call
Valuation expansion
Current peak margins can be put to test
Financials

For the quarter ended June 2024, net sales moved up by 8 per cent to ₹742 crore and adjusted net profits by 17 per cent, to ₹102 crore. While operating margins touched 18 per cent, the margin of outperformance over the same quarter last year narrowed to just 90 basis points. In the last three quarters, the difference ranged up to 6.3 percentage points. As it invests in ramping up distribution as well as upping ad spends, a 16-17 per cent margin range is what the company is aiming for.

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