Jyothy Labs: Note ban, cost pressures pull down Q3 show

Weaker margins and slower revenue growth could lead to earnings downgrade

Compression in margins on account of higher input costs and fall in realisations impacted Jyothy Laboratories’ results for the December quarter (Q3). The cash crunch arising from the note ban added to its woes.

However, consolidated net profit grew 6.4 per cent over a year to Rs 22 crore (the Bloomberg consensus estimate was Rs 29 crore), as the tax rate fell from 38.6 per cent to 34.3 per cent.

These tax savings were driven by shifting of production to its Guwahati plant (which enjoys tax exemptions) and reversal of taxes paid earlier. Apart from triggering downgrades of full-year earnings estimates, this miss could also keep the stock price under check.

The fabric care (Ujala, Henko branded products) and dishwash (Exo, Pril) segments, together contribute three-fourth of Jyothy’s consolidated revenue, saw slight moderation in revenue growth but were still the main drivers. Household insecticides, third largest contributor, dropped 15 per cent due to weakness in the eastern region and a general slowdown.

A six per cent fall in Margo soap’s revenue led to a flattish show by the personal care portfolio. A total standstill in wholesale markets (40 per cent of Jyothy’s India sales) for the first two weeks of November, coupled with the cash crunch faced by consumers, had a bearing on growth.

But, support came from a 20-plus per cent growth in both modern trade and the canteen & stores department channels. Overall, net revenue grew 3.3 per cent over a year, fuelled by volume growth of 3.6 per cent.

 

Despite pruning advertising spending, rising input costs significantly impacted gross profit and operating earnings margins.

K Ullas Kamath, joint managing director & CFO, said the company had hiked prices in select products this quarter and expects to recover some margins.

The scrip fell 1.2 per cent after the results on Friday. It trades at 34.5 times the one-year forward estimated earnings and seems to adequately capture most of the positives.

It is important to note that expectations of a potential open offer, if Henkel exercises the option to buy up to 26 per cent stake in Jyothy, is keeping valuations elevated.

Both companies are discussing the price, amount of stake and timing. A decision is likely by March-end, added Kamath. While clarity is awaited on this, a weak quarterly show could put the stock under pressure.