This Small Cap Consumer Goods Stock Grew 48% In 1 Year, Shares Likely To Surge, Sharekhan Retains Buy

Sharekhan retains Buy rating on Jyothy Labs Limited with a revised price target of Rs. 240/share. The brokerage claims a potential upside of 18% from its current level. The company is one of the better-performing companies in the small-cap consumer goods space with eight consecutive quarters of double-digit revenue growth, driven by a mix of price and volume growth. Below are the key takeaways from the report:

Stock outlook & Returns

26 December, the stock surged 2.26%, ending at Rs 204.05 apiece on the NSE. The stock recorded its 52 week high at Rs 217.90 apiece on 22 December 2022, and its 52-week low at Rs 130.15 apiece on 24 February 2022, respectively. It has a market cap of Rs 7,492.89 crore.

The stock in a week, moved down by 1.64%, while in a month, it moved up by 4.72%. In 3 months, it moved up by 14.12%. In the past 1 year, it gave a maximum 47.92% positive returns. In the last three years, it has given 37.22% positive returns and in the past 5 years, it has given 5.48% positive returns, respectively.

Growth momentum to sustain; Margins to gradually improve

Jyothy Labs Limited (JLL) has posted eight consecutive quarters of double-digit revenue growth, driven by a mix of volume and value (with pricing growth remaining higher compared to volume growth for the past few quarters). The company has been consistently delivering mid-single digit volume growth of 4-5% for the past three quarters. Most of the categories are performing well except for the decline in the household insecticide (HI) category impacted by industry headwinds. "We expect double-digit revenue growth momentum to sustain in the quarters ahead. However, with the expected pick-up in rural demand, the volume growth trajectory should improve in the next one to two quarters. We expect OPM to stand at around 12% in Q3 and improve to 13-14% in Q4 if palm oil and crude oil prices remain at the current level (both have corrected from their high). However, the recovery to historical OPM of 16- 17% will take time as the company will also incur ad-spends and promotional activities to gain better volumes in the long run," the brokerage has said. 

Revenue to grow in double digit in H2; Volume growth trajectory likely to improve in FY2024

JLL's consolidated revenue grew by 13% y-o-y in H1FY2023 (CAGR of 12% over H1FY2020). Volume growth in H1 stood at 5%, while the rest of the growth was price-led growth. Most of the company's key categories are performing well, barring household insecticide. The company is focusing on achieving volumeled, double-digit revenue growth in the medium to long term through driving category development, increased brand-building initiatives, digital technology driving sales efficiency in go-to-market initiatives, market share gains, distribution expansion, and improving penetration for key categories in rural and urban markets. With falling consumer inflation, rural demand is expected to improve, which will aid in JLL's volume growth to improve to high single digit in the coming quarters (expected from Q1FY2024). 

New product launches and distribution expansion will support overall growth

The company's main focus remains on expanding the distribution of key brands in newer markets, improving the saliency of liquids in the HI category, and improving traction for lower unit packs in the dishwashing category to deliver consistent growth in the long run. The company currently sells its products through one million direct outlets and three million indirect outlets. JLL targets a consistent increase in the distribution reach in the coming years. Further, the company is planning to launch new products and take some of its recent launches to new markets in the coming years. 

OPM to stand at 13% in FY2023; Will gradually improve in the coming years

JLL's consolidated OPM stood at 11.2% in H1FY2023 (declined by 50 bps y-o-y). We expect OPM to stand at around 12% in Q3 (in-line with 12.1% achieved in Q2FY2023) and improve to 13-14% in Q4 if palm oil and crude oil prices remain at the current level (both have corrected from their high). However, the recovery to historical OPM of 16-17% will take time as the company will also incur ad-spends and promotional activities to gain better volumes in the long run. 

Sharekhan Retain Buy with a revised PT of Rs. 240/share

JLL has posted a resilient performance in the past few quarters on the backdrop of a tough demand environment in the domestic market (especially in rural India). Product innovation and 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. The stock is currently trading at discounted valuations of 32.5x/23.9x/19.7x its FY2023E/FY2024E/FY2025E earnings compared to some of the large peers. Improving cash flows, focus on achieving double-digit volume growth, and attractive valuations make it a good mid-cap pick in the consumer goods space. We maintain our Buy recommendation on the stock with a revised price target (PT) of Rs. 240 over the next 12 months. 

Highlight the key risks to the buy call, the brokerage stated that Any late recovery in the HI category or market share loss in some of the key categories (dishwashing and fabric care) 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 consult with certified experts before making any investment decision.