Jyothy Labs Limited (532926) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Jyothy Labs Limited Q3 FY '20 Earnings Conference Call. Today we have with us from the management, Mr. M.P. Ramachandran, Chairman and Managing Director; Mr. Ullas Kamath, Joint Managing Director; Ms. M.R. Jyothy, Chief Marketing Officer and Executive Director; and Mr. Sanjay Agarwal, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. M.P. Ramachandran for opening remarks. Thank you, and over to you, sir.

Good evening, friends. I'm Ramachandran, and our Q3 results are already with you. I invite all of you for a discussion on the matter. As informed to you, our people are there to clear up all your doubts if at all there is anything. Thank you.

Thank you, sir. So it's great talking to all of you and sharing highlights of our quarter 3 FY '20 results. I presume all of you have our investor presentation with you. So before we discuss the market scenario and the results of quarter 3 FY '20, a brief summary of Jyothy Labs. Company is founded in '83 by Mr. M.P. Ramachandran. We cater to 4 categories: Fabric Care, Household Insecticides, Personal Care and Dishwash, having 6 power brands, Ujala and Henko, part of Fabric Care; Maxo, part of Household Insecticides; Margo, Personal Care; and Exo and Pril, part of Dishwash. Some of the key facts about the business are highlighted below. Our top line was INR 1,750 crores plus revenue in FY '19. We are #1 in Fabric right now, Ujala brand, since its launch; #2 in dishwash bar, Exo, and liquid category, which is Pril; #2 in mosquito-repellent coil, Maxo. We service 2.8 million outlets, out of which 0.86 million are with direct reach, serviced by our 2,000-plus sales force and 5,400-plus stockists. We manufacture across 26 manufacturing locations, and we are part of the BSE S&P 500 and Nifty 500. Now moving on to the market scenario. In specific, we have observed that during this quarter there's been an overall slowdown in the economy, which has impacted the demand for FMCG products. So urban demand is stable. However, there's been a muted rural offtakes. Working capital has been stretched for channel partners; and thirdly, categories which have lower penetration, like Dishwash and Household Insecticides have seen a better growth. In summary, for us, this quarter has been relatively a mixed quarter. Revenues have declined primarily because of one-off issues. However, our market share across all our brands continue to remain intact, which we'll discuss in further detail. Moving on to financial results. Our revenue is down by 5.9%. Gross margin has improved from 46.5% to 48.7% in the current quarter because of benign input cost environment and certain cost efficiencies. Advertisement cost or investment is at INR 25.2 crores, and as a percentage to sales, it's 6% versus 5.5% last year. Operating EBITDA at 15.8% versus 16.1%. PAT at INR 45 crores as against INR 51.1 crores. For the 9 months, our revenue has grown by 1.6%. Gross margin has improved from 47% to 47.8%. Advertisement expense is at INR 87.1 crores versus INR 80.4 crores, up by 8.4%. And correspondingly, A&P cost to sales is at 6.6% versus 6.2% last year. Our operating EBITDA for the 9 months is at 16% versus 15.4% in the same period last year, up by 5.5%. PAT is at INR 136 crores as against INR 130.8 crores, up by 4%. To give a brief outline of the quarter 3 FY '20 sales, there's been a reduction in revenue of 5.9%, primarily due to a 4% one-off moderation in the institutional sales, and maybe I can take a minute to just explain about this. This is primarily on account of the CSD sales, whereas in the quarter 1 of FY '19, sales -- as you all will recollect, the sales ordering process since CSD in quarter 1 of FY '19 was changing. And hence, all the sales orders had started coming in the end of quarter 2 and quarter 3, so which led to a higher base of quarter 3 FY '19. Therefore, in this quarter of FY '20, which has been a normal quarter, in comparison to the quarter 3 of last year, there is a degrowth. If you look at the month of January and the orders we've received in February of this year, we are in line with the previous year numbers. So this has been one correction which we have taken from the base numbers so that the business going forward remains intact. The impact of this reduction in CSD business has been more in Fabric Care and Personal Care. And accordingly, you will see both the categories have seen a degrowth. A 1.9% degrowth has happened on account of general trade, where we have seen more pressure on the rural slowdown, and rural accounts for 40% of our business, 35% to 40% of our business. And there we have seen more working capital constraints at the distributor and the wholesale level. We continue to do our business on cash-and-carry in GT, so that we have not been -- at this point in time, we have not given any additional credit in GT, so the hygiene of the business has been maintained perfectly. Now in spite of all these above-stated factors, our market share across all our brands continue to remain intact. So that's the broader summary of our sales for this last quarter. Our category wise net revenues are as follows: Fabric Care has degrown from INR 193 crores to INR 172 crores. Dishwashing has been flat at INR 150 crores. Household Insecticide business has shown signs of improvement, it is up by 1.7%. Personal Care, now a small quarter being a winter season, is down by INR 4 crores to INR 36 crores. Overall, for this quarter, our revenue stands at INR 421 crores, and for the 9 months ended December 31st, at INR 1,318 crores, up by 1.6%. In summary, our revenue from operation is at INR 421 crores versus INR 447 crores. Operating EBITDA is at INR 66.3 crores versus INR 72.1 crores. PAT is at INR 45 crores versus INR 51.1 crores. And cumulatively, for the 3 quarters, revenue is up by 1.6% and for the 9 months ended December 31st, PAT is up by 4%. If we look at the overall financial parameters, our gross margin has improved from 46.5% to 48.7%. Operating EBITDA margin has remained in the range of 15% to 16% over previous year as well as for this full year. Similarly, the PAT margin has remained in the range of 10% to 11%. A quick presentation of how the EBITDA has moved from last year to this year. There's been a 2.2% saving in gross margins. Employee cost has gone up, as we have added sales force on the ground strategically across India to strengthen our retail coverage. Advertisement expenses have gone up by 0.5%, leading to current period EBITDA at 15.8%. Now moving on to brand performance and initiatives. The next slide talks about our category strategies, which I'm sure most of you know, have been driven by premiumization, innovation and distribution. Our category wise business share, which has broadly remained same in this quarter also, 27% is Main Wash, 14% is Post Wash, Dishwash is 36%, Personal Care is 8% and HI is 10%. If we look at the Fabric Care business, yes, there is a degrowth for the reason I explained. There is a transition degrowth of 11% in this quarter. If we look at the consequence of the Fabric Care, Ujala Fabric Whitener, our market share remains intact. And to increase the usage of fabric whitener, we have been focusing on activations and trade to drive visibility through dangler packs and also driving superiority of Ujala Supreme to -- for low-cost views through consumer activations. Ujala Crisp & Shine has grown [ 12.9% ] in the last 9 months, and we have been driving the category growth through new variants, which we'd introduced Gold Collection to generate consumer interest. Currently, we have been primarily selling in Kerala and Tamil Nadu and plans to extend it to Karnataka are there. Ujala IDD detergent, which we sell only in Kerala as of now, remains to have a leadership position as a mid-prime detergent brand in Kerala. Our market share has improved there from 15.5% to 16.3%. We have launched a new TVC ad with the brand ambassador, Manju Warrier, and Fast Wash bar also continues to do well. The next slide talks about Henko franchise, which is a premium detergent brand for us, which has been growing at 11% on a 9-month basis, and we are seeing double-digit growth in Stain Care and Henko Matic for the 9 months. We have been focusing on certain BTL initiatives in our key markets. We'd done some tie-up with electronic chains to sample Henko Matic with washing machine buyers. Overall, we see a good traction in Henko franchise. The next category for us is Dishwash, which is one of the fastest-growing portfolio for us, accounts for 36% of our business. You can see our national all-India market shares have remained, for the full calendar year, at 11%, and for Pril liquid at 16%. So they have been maintaining their leadership in both the bar and the liquid format. So [indiscernible] position in the Dishwash category, based on the consumer insights, we have launched a Dishwash brand, Exo, in super gel form. I mean you can see the pictures, and currently it's being sold in -- or it's been launched in Kerala. The whole format of Exo gel is the power of bar and shine of a liquid, and our initial response has been encouraging. So we are very hopeful that this brand Exo will get further strengthened with the launch of gel. To drive penetration -- further penetration in the Dishwash category, we've been focusing on small packs, and -- which we have been speaking about in the past, both about the Exo bars of INR 5, INR 10, that's grown at 19% in this quarter, and similarly, we had introduced pouches in Pril Tamarind 2 quarters back, which now constitutes to 10% of the Pril brand. So overall, the strategy to do a higher penetration in the Dishwash category is faring well. The third category for us is Household Insecticides, and after many quarters, we have seen positive growth, both in volume and value. Value-wise though, franchise has grown by 1.7% in this quarter, with a 5% volume growth, and Genius LV has been performing very well, and the saliency of Genius LV, which is the -- has become 15% of the total LV sales in quarter 3. The next slide talks about Household Insecticide market share, both for coil and LV. Coil has remained intact for the full calendar year at 21.1%, while for the LV, it has increased from 7.6% to 8.1%. And this has been because we have been continuously spending our -- I mean with the media spends on LV, having Rajkummar Rao as our brand ambassador. So that's HI. We're very positive and next quarter, quarter 4, is one of the largest quarters for HI. And if season is fine and our LV doing good, we think -- I mean the next quarter can have a decent growth in HI for us. However, the issue still remained about the mosquito repellent incense sticks. So the coil category continues to be challenged by growth of incense sticks, primarily the spurious ones, in spite of government actions and HICA bringing awareness to the consumers of not to use it. However, as you will see on the slide, as per AC Nielsen at MRP, the growth in the incense sticks has been at 40% from INR 551 crores to INR 776 crores. So that -- this continues to remain an issue for this category, and we'll see how, next few quarters, incense sticks usage comes down. With this, we come to the last part, the fourth category for us, which is Personal Care, and primarily Margo. We've been focusing on driving visibility drives and trade activations. New consumer promos have been launched. And last year, we launched Margo Glycerine. We are extending the Margo Glycerine from West Bengal to Tamil Nadu, and we launched it in Tamil Nadu after Kerala. So the Margo Glycerine franchise is extending to other states. Also to further extend the brand equity of Margo with the new millennials, we have launched Margo face wash, which is India's first neem paste face wash, in West Bengal. Again here, the initial feedback has been positive. T-Shine, which is currently available in Kerala market, 100% organic base toilet cleaner. We have relaunched it with revised formulation and packaging, and currently sampling as well as promoter activity have been done to let consumers know about the product features. The next slide talks about a snapshot of our innovation, differentiated positionings, we have across our brands, disruptive products like India's first neem paste face wash, Crisp & Shine [ which gives ] form and finish for clothes. Similarly, the world-class packaging in Pril, Henko and all other brands. Coming to -- now to the way forward for quarter 4. We believe some of these government initiatives, which have been aimed at rural India and middle class will improve the consumption offtakes. And more so, the confidence comes from -- we'll see how the impact of the union budget measures which have been taken get implemented. At the company level, we continue to focus on gaining market share across brands. We continue to focus on BTL activities to enhance secondary sales. Similarly, to tackle down the slowdown, our frequency of retail servicing, whether it is from monthly to fortnightly, fortnightly to weekly, that has been the key message to the sales, and also strengthening our distribution with the aid of technology and addition of manpower at different -- in different states. With that, I will wrap up my presentation, thanking you all, and we'll be happy to answer now any questions you have.

[Operator Instructions] The first question is from the line of Manoj Menon from ICICI Securities.

So just a few questions from my side. One must say that it's actually a fairly detailed presentation. So happy to see that. The first is actually on the channel credit comment which you made. When I look at you bought a couple of companies appears to have done, to just take names, because it's in the public domain, which is Lever and Dabur, it appears that they're actually giving credit to distributors. But if I understood your commentary correctly, you've not really done any such lubrication.

Yes, Manoj, I think you're perfectly right. The objective was not to break the hygiene of the business. And GT business, which we have been doing on cash-and-carry continues to be on the same lines. And whatever correction we are to take this quarter, we have taken that. And in fact, it has corrected the inventory or the stock at the distributor level, which gives us a good -- for us to do the business with them, and in this environment, with the less of credit and less of inventory with them.

Okay. So would it be fair to then assume that secondary growth has been significantly higher than primary? Or how do I think about that?

That said, Manoj, secondary growth has been positive for us.

Would you have a number by any chance, ballpark?

No. I think it's been fairly flattish and to -- at this point of time.

Okay. So it's almost like a 5%, 6% swing factor, or I should just [ look ] at institutional and say it's a 2% swing factor?

No. It will be -- at the flat level, it will be -- if the company is at minus 5%, minus 6%, it will be at anywhere between 0 to 1%.

Oh, wow. Okay. Understood. Secondly, just a couple of questions again on the revenue side and then before the one on margins. Good to see a recovery or rather trajectory improvement in insecticides. But that said, the trajectory improvement appears to be definitely lower than what at least consensus was assuming or hoping for. The reason I'm asking this is because there appears to be a little more competitive activity in the category, led by Godrej, which was probably not the case 1 year back. So 2 questions here. One, how do we think about the categories' trajectory improvement and what it means to you? And point #2, the competitive situation, if at all, is there any change? Or is it just an assumption, my assumption, which is actually right or wrong?

Yes, so Manoj, the category growth has been, for the first time, we have seen the category has started to do positive, and therefore our results as the market leader has also been positive. And a lot depends now on how the season picks up in this next quarter. And if that is fine, then I don't think so then there'll be -- the issues of negative growth would be there. At the same time, the incense sticks -- the coils have not done that well but liquids has started to do well.

[Foreign Language], understood. Okay, okay, okay. And any qualitative comment on the innovation pipeline?

So we always had the Maxo Genius, which was the first automatic machine, where you don't have to switch on in a high and a low mode. So we continue to have that, and that is why the product has been accepted, and our market share has increased now to 8.1% on a national basis.

And Margo face wash?

[indiscernible]

Okay, okay. Understood. Okay. Just one question on the gross margins. So despite this -- a couple -- I mean -- on the revenue, is it essentially the gross margin improvement is predominantly mix? Or what could be the other drivers, if you could help?

So Manoj, primarily it is because of, I mean the RM prices, for us, which is more of the LABSA prices, have been soft, and -- which has gained the gross margins and also certain operational efficiencies, which has brought the RM -- the gross margins to go up by 2%.

Okay. And if I may ask, any comment on how do we think about the next few quarters in terms of the overall revenue trajectory?

So for the next few quarters -- I think for this quarter a lot depends on how Maxo performs and the HI category performs. If that goes well, then yes, we'll be in the positive category or the positive range. And next few quarters, again, I guess it will be more driven by the macro. If the overall environment of liquidity issues with the distributor and wholesale level eases out, then we can definitely see better higher growths to come in.

The next question is from the line of Abneesh Roy from Edelweiss.

My first question is on HI. When do we see negative pricing in HI go away? So can you expect that in Q4?

And what do you mean by negative pricing, Abneesh?

This quarter, if you see, there's a negative pricing of 3%. So volume growth of 5%, but sales growth of only 2%.

This is, I guess, more of a product mix and more on the coil side of it. The liquids have remained -- there's not much of a price gap out there.

No, but Genius has grown so much strongly. So wouldn't have -- that have helped the pricing because coils, I think, would have lagged the Genius growth.

Yes, that's helped.

Why that's not -- is it because of the discounting, which is there in LV?

See we are not doing any discounting in LV. And our prices have remained flat, what we have been giving last year and this year. And I think we've been driving more about -- talking about the superiority of the product what we have. And some of the media spends is where we are giving money rather than giving any price offs.

On incense stick, how has been the last 6 months? FY '19 was very strong for the illegal industry. So my question is on the illegal industry in first 6 months of this financial year how the growth has been, and Q3 also if any comment is there? And how has your own incense stick done?

So Abneesh, you would have seen the slide talks about how the incense sticks has been growing. It has been growing at 40% from FY '18 to '19, so that continues to grow in spite of all of the various initiatives government has been taking to bring awareness to the consumers for not using it. So that continues to grow. Now somewhere, the category has been either flattish, or if we are going to see a mid-single-digit growth there, that will be there in spite of this category -- incense sticks growing at 40%. But what we think is if the season picks up, and as what the initial signs have been, we would be -- I mean the category should start doing well.

My second question is on the Kerala market. You have a disproportionate presence there. And corona obviously has impacted that state the most currently. So are you seeing on the trade channels any impact, either because of closure or because people are going out less?

No, Abneesh. I think it's too early to say that. There's been no impact because of that. And so we will just pray -- wish that nothing affects the business, neither in Kerala nor in India.

Last question is on multi-active concentrate, which you've called a revolutionary product. So my question is this will take more from the bar or the liquid, or this will create a new category? Because the pricing doesn't seem cheap. For a 1 kg, I think it's around INR 200 pricing. So how -- why is it revolutionary?

So this is a new gel format. Yes, so the putdown price is higher, but where Exo stands for value for money, and this will wash more number of plates compared to the existing liquids in the market. So that's how you have that power of -- why we say a power of bar because it's a multi-active concentrate, it's in the formulation. And the delivery that you get is the shine of the liquid. And the pricing is such that it is a premium because one is, it delivers much more plates; it gives economy of usage and much more value for money.

And last question on soaps. Market leader seems to be growing slower than some of the #2, #3 players. So what is your comment on the promotional intensity? Has it increased in the last 2, 3 quarters? And do you see that reducing now that the raw material pressure is again there?

So for us -- the soaps, for us, is Margo, which is a niche, and it doesn't directly compete with the other market players. So we continue -- we haven't reduced our price. We continue to focus on the brand, and with certain extensions of glycerine and face wash, we believe that it has its own march -- I mean the journey, and we are not intending to getting the price wars with the market at this point of time.

Sir, sorry to interrupt. Sir, we would request you to join the question queue for any follow-ups, as we have several participants waiting for their turn. Thank you. [Operator Instructions] The next question is from the line of Sameer Gupta from India Infoline.

Sir, this is Percy here. Sir, just trying to understand your top line a little better in the context of the 6% decline that you have posted. So two thoughts here on this. Firstly, the 4% sort of impact of CSD that you called out in the base; was just wondering, I mean, is it really that large? Because I was looking at your transcript of Q3 FY '19, and there was no mention of this at that time. And secondly, on a sequential basis, if I look at your sales, it has declined 12% versus Q2, Q2 versus Q3, and historically, if I take the last 5 to 7 years and see how Q2 versus Q3, what is the traditional or historic seasonality, that's just about flat to minus 2% kind of a number, whereas this quarter it is minus 12%. So what explains this big difference in the sequential growth?

Yes. So CSD business will be around 8%, 10% of our business, Percy. And then you look at the Q3 of FY '19 because the orders didn't come -- came in the Q1 and most part of the Q2. Therefore, the Q3 became a -- with a higher base. Now when you look at the Q3, you will now find -- Margo, when you're comparing with Q2 and Q3, you will find Q3 will have the least saliency of Margo, which is a seasonal product. So Q2 to Q3, you will find Q2 you'll have more of Margo sales, and -- while in Q3, you will have a reduced number to that extent. And that's the only explanation for Q2 and Q3 variance.

But sir, that would have held true even in the past, right? So if I take your last 5 to 7 years and see on an average, Q2 to Q3, what is the differential, it falls by only 2%. But this quarter, the fall is much higher than that. So is it -- I mean some other factor, like as you said, probably some pipeline correction this quarter or something? I mean if we can get some more color on what really are the factors going into this decline. And if some of them are like one-offs, then we get a sense how to project forward?

Yes. So it is exactly what we've explained in the presentation also. So one-off of this 4% of CSD has impacted both the Fabric Care and the Personal Care business this time. Second, the Maxo sales, which happen only in the Q4 more, and Margo sales, which would be happening lesser in Q3. Third point which you said is on the -- bringing the stock levels low at the distributors' stock point, yes, that is right. We wanted to consciously do it because in this environment where we did not wanted the distributors or the wholesaler, where we offer them credit and they stock it, just for us to make the numbers. And therefore we have dropped down the inventory at the distributors' level and continue to be on cash-and-carry with them.

So sir, on distributor inventory, what is the current number of days? And how much it has come down in the last 3 months?

So we have been doing -- again, it will depend on market to market and brand to brand. But in an average, it will be around -- it has come down from 30 odd days to 25 to 22 days.

Okay, understood. Sir, second question is on margins. By FY '21, the kind of EBITDA margins that you can do, would it be similar to FY '20? Or do you see any risk of a decline there?

We'll definitely be doing in the range of around 16%. [indiscernible] we've been doing now.

Okay, okay. Fair enough. So if there is any kind of gross margin benefit, it will get reinvested in the brands.

Absolutely right.

Right, sir. And traditionally, you have been giving some kind of idea on what your top line growth target would be for the year. So is there any such sort of help you can give us in terms of understanding what your aspirations are for FY '21 in terms of growth?

Sure. But, A, it will depend much on the macros. But second, we will be giving this guidance post March results, and you'll definitely hear about it.

The next question is from the line of Harit Kapoor from Investec.

Just a few questions. Firstly, on the Personal Care side. So you've seen a dip on the Personal Care EBIT margin for this quarter. Is that largely because of the negative operating leverage that you've seen a lower sales growth? What would have been the reason?

Yes.

Yes, one is definitely on that. And this quarter, since we have launched Margo face wash, there's been more spends in that particular Personal Care in this quarter.

Okay, okay. Would it also be a function of the fact that -- and do you expect this to be fairly subdued going forward, given the fact that the material costs have also gone up now?

No. I think the EBIT margins will come back in Margo. This next quarter should be fine, as well as PPD prices have again started to become -- being more soft. So we don't see any pressure coming in on the margins front in Personal Care.

On the -- you've mentioned in the presentation that there was a relaunch in T-Shine. So what type of a relaunch is this? I mean it's communication-led or product-led, packaging-led? What has changed?

So it's all the three. So the -- what we were doing is we were doing a test market in Kerala. And whatever the learnings were, we have incorporated that, and we've revised the formulation, completely changed the design and packaging and also the communication. So it's all the 3, and we are seeing results in that.

And this was done beginning of this quarter? Or...

Yes, just about last quarter, yes.

Last quarter, okay. The other thing was on coils. So if you could just tell me now what's the salience of coils for you in the overall HI piece now?

So we have around 60% which is coils, and 40% is liquid.

And incense would be how much now, sir?

Incense is too small, I mean.

Too small, okay. Got it. Got it. Just one last question. According to some of the market research agencies, the sense is that the South market in this year has done better than the other regions in terms of growth. So since you are a fairly significant player in South, would you also have seen a similar kind of a trend in terms of your growth versus rest of India growth?

Yes. Yes, that's right. I mean, Harit, South continues to do well. 40% of our business comes from there, and that continues to do well as compared to the other -- some of the other states.

The next question is from the line of Pooja Doshi from Motilal Oswal.

Sir, I just wanted to know what will be our effective tax rate on stand-alone basis for FY '20.

So you can take on a consolidated basis at around 15%.

Would it be a similar number for the next year itself?

Yes, that's right.

Sir, you are not audible.