– Strong operational performance in Q2 FY20
– Excluding household insecticides, volume growth was 9.1 percent
– Maintains a low double-digit sales growth guidance in FY20
In this edition of Tactical Pick, we are recommending Jyothy laboratories (JL). It has a strong presence in South India, particularly in dishwashing and fabric care segments, with a sizeable retail reach of 8 lakh outlets. The midcap FMCG company has gained investor attention due to its superior performance in the September quarter.We have a positive view on the stock due to the following reasons:
- In Q2 FY20, sales growth of 8.5 percent YoY (year on year) was mainly helped by volume growth of 8.3 percent. Compared to FMCG sector average volume growth of 3.3 percent, this performance was commendable given macro challenges and consumption headwinds. Excluding household insecticides, volume growth was 9.1 percent.
- Q2 EBITDA margin of 17 percent was largely flattish on YoY basis. Here, higher advertising spend and employee cost were offset by lower other expenses. Sequentially, there was a strong improvement of 110 bps largely aided by reduced operational expenses.
- Fabric care, which is the largest segment and contributed 40 percent of sales, grew by 13.1 percent and the company continued to gain market share in its key brand – Ujala Fabric whitener. Also it reported good traction for its post-wash solution – Ujala Crisp & Shine – which grew by 25 percent YoY.
- Further, performance of its personal care segment (12 percent of sales) was ahead of expectations with sales growth of 6.9 percent aided by soaps brand Margo. Notably, it achieved this without cutting prices as done by its peers –HUL and Godrej Consumer. The management believes it did not need to lower prices since its brand sells on a differentiated positioning.
- The dishwashing segment (Exo and Pril), which made up 33 percent of sales, posted 8.6 percent growth in Q2 backed by low unit packs (LUPs) of Exo. Further, Pril Tamarind is gaining acceptance and contributes 10% to the brand in the relevant trade channel.
Key risk: Household insecticides segment (10 percent of sales) continues to see headwinds. Unlike the positive performance shown by Godrej Consumer in this market segment, Jyothy’s sales declined by 1.3 percent due to a delay in onset of rainy season in UP and eastern states which are among company’s major markets for insecticides. Still, the management expects some recovery due to regulatory action on illegal incense sticks. GoI (Government of India) has recently put curbs on imports of agarbatti which could prompt consumers to either shift to natural agarbatti or to the coil segment.
In the near term, the company has guided for 10-12 percent sales growth and 16 percent EBITDA margin in the current fiscal year, which is relatively good considering the slowdown. Unlike larger FMCG players Jyothy is cutting back on advertising spends in the current year to support margins.
Its reasonable growth is on offer at an attractive valuation. The stock trades at 24x FY21e earnings, which is at more than a 40 percent discount to the average of FMCG majors. This valuation discount remains unprecedented. Looking at past 10 years data, one finds that stock on average has traded at around 20 percent discount to the average valuation multiples of FMCG majors (HUL, Marico, Dabur, Godrej Consumer, Britannia).
Note that stock was severely impacted post Kerala floods last year. This along the headwinds of consumption slowdown led to stock price correction of ~40 percent from July’18 to Sept’19. Now, while stock has run up by 27 percent from its recent lows, we believe valuation discount to the FMCG majors should further shrink towards the historical average, as its earnings potential unfolds. We believe the stock has more to offer given stable business outlook, ability to sustain margins and diversified product offering.