Buy This Small Cap FMCG Stock, Shares Can Surge, Target Price Rs 215: Sharekhan

Sharekhan maintains its 'buy' rating for Jyothy Labs Ltd. (JLL with a revised target price of Rs 215. The brokerage claims potential gains of 17%. JLL is a Small Cap FMCG sector company with a market capitalization of Rs 6,809.88 crore.

JLL was founded in 1983 by Mr M. P. Ramachandran in Thrissur, Kerala. With a humble beginning as a single-unit, single-product manufacturing company. The Company has grown significantly to become a leading FMCG player with a pan-India presence and several household brands.

Stock Outlook & Returns

JLL's current market price is Rs 184.55 apiece, currently trading 0.32% down from its previous close. Its 52 week low is Rs 130.15 apiece and the 52 week high is Rs 198.40 apiece, respectively.

JLL shares in the past 1 week surged by 1.43% and 2.16% in the past 1 month. In the past 3 months, the shares moved up by 21.29%. Over the 1 year, the share surged 9.67% and in the past 3 years, it surged 9.44%, respectively. However, in the past 5 years, it has fallen by 2.87%.

Double-digit revenue growth to sustain; margins to improve gradually

Sharekhan said, "We talked to Mr Sanjay Agarwal, Chief Financial Officer (CFO), of Jyothy labs (JLL) to understand the company's current business environment and future growth prospects. Q2FY2023 is expected to be another quarter of price-led double-digit revenue growth with sales volume expected to grow in mid-single digit. Higher inventory of key raw material (maintains 6-8 weeks of key inputs) would delay in flow of benefits of sharp correction in the key input prices in the recent times. Margins should start improving from Q3FY2023. The company is likely to undertake price cuts/reinstate of grammage to pass on the benefits of lower input prices to consumers in the quarters ahead. This will help volumes to gradually recover in key categories. However, the price actions will depend on competitors' actions and momentum in the key input prices. Working capital days will continue to remain at around 20 days and cash flows will consistently improve in the coming years."

Double-digit revenue growth to sustain; volume growth to gradually improve

The company is targeting to achieve volume-led double-digit revenue growth in medium to long term through category development, increased brand building initiatives, digitalisation and higher consumer connect. JLL's market share in key categories (except for Pril Liquid) has seen consistent improvement of 150-300 bps in the past three years. Its products are currently available 2.8mn stores (direct reach expanded to 1 million outlets). Overall, JLLs revenues are expected to grow at CAGR of 14% over FY2022-24. In Q2FY2023, revenue growth will be in double digits, which will be largely driven by price hikes (9% in Q1FY2023) undertaken to mitigate the impact of raw material inflation.

OPM to recover to 15% by FY2024; raw material inflation cooling off

Raw material inflation in Q1FY2023 stood at 14-15%. Recent correction in the crude oil (24% correction in last six months), palm oil and crude derivatives prices will help JLL to post better OPM in H2FY2023. With expected stable raw material prices and expected recovery in the volume growth, we expect OPM to recover to 15% by FY2024. Better revenue mix led by improvement in revenue contribution of some of high margin products such as liquid vaporisers in household insecticide (HI) category, premium detergent and post wash products will help further improvement in the margins in the coming years.

Strong cash flows; return profile to improve consistently

JLL's net cash flows stood at Rs. 85crore with consistent improvement in the operating cash flows led by stable working capital. With working capital expected to remain at around 20 days and no major capex on books (capacity utilisation stood at 65% in Q1FY2023) in the coming years, the cash flows are set to consistently improve in the coming years. With an expected improvement in the profitability and no-debt on books, the return profile will improve strong by FY2024. We expect RoE and RoCE to stand at 19.4% and 21.6% in FY2024 as compared to 11.1% and 13.2% in FY2022.

Valuation - Retained Buy with revised Price Target of Rs. 215

Commenting on the valuation, the brokerage said, "We like JLL's focus on achieving double-digit revenue growth in the medium term with relevant strategic initiatives undertaken in recent times. Product innovation, availability of relevant product assortment for general trade/e-Commerce/modern trade and distribution expansion will help JLL to continue to gain market share in key categories. We expect JLL's revenues and PAT to grow at a CAGR of 14% and 35% over FY2022-24. The stock is currently trading at discounted valuations of 30.8x/22.9x its FY2023E/24E earnings compared to some of the large peers. We maintain a Buy on the stock with a revised price target of Rs. 215. Key Risks Any late recovery in the recovery of HI category or market share loss in some of the key categories would act as a key risk to our earnings estimates."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.