Cruising ahead
We maintain Jyothy Labs (JYL) as a high conviction BUY idea, with a TP of Rs 575 (40x June-26 EPS), as it is one of the few FMCG companies structurally poised for high single-digit volume growth, mid-teen EBITDA growth, and high-teen net income growth. We pencil in revenue/EBITDA/PAT CAGRs of 12/16/17% for FY24-27, the second-highest amongst our coverage of consumer staple companies. Our confidence stems from the fact that a) JYL operates in categories which have a higher Total Addressable Market and, despite being a challenger brand, is trying to grab a pie of the same by making the product portfolio comprehensive, launching low unit packs, communicating product superiority vs. competition, and providing value-for-money offerings; b) it’s got the basics of FMCG right under its new leadership – i) increasing the distribution network and, at the same time, improving productivity; ii) moving on to Above the Line (ATL) spends, away from BTL spends; iii) focusing on low unit packs across the product portfolio, so that it aligns with its objectives; c) competent key management personnel are ensuring smooth execution of the above strategy, which was not the case with the erstwhile management, who were more tuned towards doing M&A transactions. Reasonable valuation (34x FY26 EPS) provides a significant margin of safety. We call Jyothy Labs sarva gunn sampann—as it is completely versatile and has enough weapons in its armoury to combat any challenge.
We have gone through Jyothy Labs’ recently published annual report in detail and have been able to cull out some relevant interesting insights, which have been segregated into three parts – a) Financial Metrics: significant improvement in return ratio; b) Operational KPI dashboard – which is again giving us the confidence that it will sustain high single digit volume growth; and c) categoryrelated insights – more from distribution and advertisement perspective
Financial metrics
A sharp surge in ROIC: Jyothy Labs’ ROIC has sharply surged, moving up from c17% in FY23 to c28% FY24, owing to a sharp spike in EBIT margin (up from 10.7% in FY23 to 15.6% in FY24) and doubling up of cash and cash equivalents (moved up from INR 2.8 bn in FY23 to INR 6.2 bn in FY24). Notably, the ROIC ratio has been static for last many years in the mid-teen range. We expect the ROIC ratio to rise to 42% in FY27. This is expected as the company can achieve double-digit growth without requiring incremental investments, given it already operates 23 manufacturing locations with decent utilisation levels. In our view, there is a high probability valuation multiple might get rerated vs historical averages if a) the company can deliver double-digit revenue growth and margin improvement and b) there is sustained improvement in the return ratio.
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