Jyothy Labs Limited (532926) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Jyothy Labs Limited Q2 FY '23 Earnings Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manoj Menon from ICICI Securities. Thank you, and over to you, sir.

Hi, everyone, representing I-Sec, it's our absolute pleasure to welcome you to Jyothy Labs 2Q FY '23 results conference call. The company is represented today by Mr. M.R. Jyothy, Managing Director; and Mr. Sanjay Agarwal, CFO. Over to the management for the opening remarks, and we'll open the floor for Q&A post that. Thank you.

Thank you, Manoj, and good afternoon, everyone. We welcome you to the conference call of Jyothy Labs. We'll be discussing the performance of the company for the quarter gone by September 30, 2022, with all of you, and we'll follow up with a Q&A. So overall, consistent performance with a revenue growth of 12.6% and EBITDA grew by 20.8%. We have all -- I mean, we have done well in spite of the inflation impacting general consumption. We continue to have the healthy double-digit growth of 12.6% for the quarter with a volume growth of 1.4%. And this is on a good base of 16% growth in the same period last year. Also, if we look at it on a 2-year and a 3-year CAGR basis, we have been growing at a double-digit revenue growth. And this has been consistent over 7, 8 quarters of double-digit for us. Even we analyze the business or I would put it the other way, if we analyze the business ex-HI and we speak about the HI business, our value growth at 17.8% and a volume growth of 5%. We've been able to strengthen our core business with focus on distribution and brand investments. And there is all our whereabout, high inflationary pressures, which are there on the household budgets. With regards to the specific commentary on channel performances, we have witnessed stable growth across all channels now. And we have been focusing on our distribution platform and also focusing on sales of our existing product portfolio in newer geographies and that resulted us in strengthening our market share across all our brand categories. Regarding our different business categories, the demand for Detergents, Dishwash and Personal Care category has been stable. However, due to lesser rains in our core markets of North and East of India, this has impacted our HI business. There's been a sequential improvement in margins. Some of the raw material prices have softened, but a large number of them still in high and keeping -- continue to keep pressure on the margins. So we'll have to see how, going forward, the raw material prices behave. Both urban and rural continue to do well. The rural demand has been impacted due to inflation, as rural are more cautious than urban consumers at the time of inflation. But for us, we see a good potential or a strong potential for us in the rural market due to focus on our rural franchise. Moving on to the key categories performance. Fabric Care is doing well. We are at 33.7% this quarter. We've taken extensive drives and on our Detergent category and focused on mid-price detergent brand Mr. White, MoreLight. They have, I mean, accelerated our growth on a pan-India basis. In Ujala Fabric Whitener, as we updated last time, we have launched a new media starring superstar Ms. Taapsee Pannu. And digital campaigns have also been rolled out across all the key social media platforms, which are accelerating our brand awareness. Also in the Main Wash category, all our detergent brands, even in the premium end Henko, Henko Matic and Liquid as well as the Ujala Liquid -- Ujala IDD Liquid, the refill pouches, they all have received very good consumer attention. In Dishwash category, both Exo and Pril continue to do well, and we have been gaining market share there. We've undertaken some focus drives in Exo to connect with the young children and consumers on the theme of how much indispensable Exo is in their lives. We continue to invest in both the brands with involvement of in few high-impact properties, which have accelerated or helped us to accelerate the sales on a pan-India basis. In HI categories, the category degrew by 8%. Our strong markets for Maxo being North and East of India. They received lesser rains hence, the impact more for us this quarter, resulting in a negative growth. Overall, we remain positive on this category and we'll continue to focus on the liquid format of the business. Finally, our Personal Care segment, which is Margo franchise. It has again delivered a double-digit growth. Neem-based Margo portfolio for soap continue to be our consumer preference for its authenticity. This category has seen frequent price increases due to higher input prices. However, as we've seen recently the soap model prices seem to have softened. So we expect the price to improve from here on. In summary, we continue to focus on our volume-led growth and continue to win market scale in our operations. We see great potential for all our products, and we'll be focusing on distribution, continue to increase our investment behind the brands, and thereby getting across to a larger consumers, gaining market share, and strengthening a position in the states where we have potential to gain further market share. We believe volumes will gradually grow from here. And sequentially, we should see improvement in margins, and we'll continue to focus on to deliver double-digit growth. With this, I finish my opening remarks, and we are happy to answer any questions or clarifications you may have. Thank you.

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

Yes.

Your voice is breaking.

Is it okay, not okay?

Now this is better.

Okay. So before I ask my question, I just want to tell you, which I think the audience should know is that Percy Panthaki from IIFL just messaged me that he is unable to press star one, and I'm also finding finally that the question queue, there's no one there. Could you just check in the back end and try to resolve it? It is very unusual for not having a question queue at this point in time in a Jyothy Labs call.

Let me check, sir.

Yes. please do that. Okay. Jyothy and Sanjay brilliant performance, given the market context in terms of demand, et cetera. Super congrats to you and team for that upfront. Now a couple of questions actually. One on Detergents, specifically. I just wanted your top-level thoughts, let's say, for a 30%-plus revenue growth performance, the volume seems to be holding up for you and also for Unilever as per the comments from both the companies. Well, I'm trying to understand the consumer behavior here. For these sort of price increases, are we to understand that there is no adverse effects of price elasticity whatsoever. Is that the way to think that consumers are not moderating usage at all? Or is it a case that there is significant consolidation which is happening for a few players, which is what we get to see?

Yes. Manoj, so in our portfolio within mid-price segment, so you see that the lower unit PAT of INR 10 end segment doing well, well for us. And also for us, the reach of these brands has been better compared to the last few years. So for us, distribution gain and also the acceptance of -- maybe some bit of downgrading of premium products also would have happened is our guess. But if the INR 10 packs and in the big stores -- in the modern trade store, the bigger packs and somehow, the consumer has found a way to play around the price equation, the price volume equation. So that's on Detergents.

Understood. Understood. So if I understood correctly, there is still some volume moderation, but probably it is not visible because we are only talking about the top few players.

Yes, yes.

Okay, okay. And does this largely hold good for, let's say, in other home care categories like a dishwashing, which you are presenting because I mean, maybe not of the same quantum of price increases in debts, but that also would have seen input push.

Yes. So for us in Dishwash, the input prices relatively compared to Fabric Care has not happened. So the input materials have gone up. We have not taken price increases to that level like that in Fabric Care. And for us, again, the low unit packs continue to do well. And that's how we've been able to sustain the volume growth and both in urban and rural.

Okay. Sure. And the second question is on Maxo. Two sub-questions there. One, Sanjay, I'm sorry if I missed that comment earlier about the performance of liquid vaporizer, salience, et cetera, in the overall Maxo. Second question on Maxo, if you could talk a bit about the geographical expansion attempts, efforts, execution, which you are actually doing in Maxo outside of the strong mark of East for that brand?

Yes. So for us, right now, coils are 60% and LVs are 40%. And this time, both the categories when the seasons playoff both of these categories do get affected as we are more skewed in the north and the east compared to the rest of the geographies. Larger sales come from geographies. And I think at this time, if you would have read a few reports on rain and things, rainfall and the whole thing on mosquitoes is if you have too much of rainfall, the mosquito larvae gets washed away. And if there is lesser rainfall then it doesn't help in the breeding of mosquitoes. So if you see right from Jan-Feb onwards, the season has not played really well this year. But we are still hopeful going ahead, the season should come back. Once in so many years, it may happen. And we are seeing this after really, really long time, this kind of playoff season really affecting. The brand was -- is on a good traction among consumers. We had kind of reached a good level, and we were also -- we have plans to grow the liquid category. I guess it's a temporary phenomenon and it should sooner come back.

Sure. And the HI category segmental performance is still close to zero. Is it maybe -- maybe just not appropriate quarter to do any sort of meaningful analysis given the revenue. Sanjay, is it a significant, let's say, operating leverage angle or a deleverage angle sitting there? Or how do we think about the trajectory of profitability in Maxo or HI, rather?

Yes. So Manoj, profitability is one key area which we have been focusing on inside. And that was going to get driven through the LV side of the business. So -- but this quarter, as we've seen, I mean, the sales have not picked up, but they have been quite negative. So going forward, we hope, as Jyothy just mentioned that the season should go fine. And then we should be on the path to profitability soon.

One last thing on Maxo, I'm sorry for pushing the envelope a bit with, let's say, 1/3, 40% of your business is from LV, how is it possible to actually have -- is it basically then are we saying that you're selling below marginal cost on the rest of the portfolio, which is largely coiled?

Yes. So Manoj, I think for a long period of time, you have mentioned that if we exclude the spend, then yes, the category remains positive for us. But since we wanted to focus on the LV side of the business, so there have been over investment to that extent. And when you look at the EBIT margins for the category, you tend to see a negative number there. So I think at a point of time when -- and we have seen those investments have been very -- result for us. So it will take some time for us to get stabilized at a decent LV number and then the whole profitability will kick in.

[Operator Instructions] Next question is from the line of Percy Panthaki from IIFL.

My first question is on the Fabric Care business, especially the Detergents. I'm assuming that the Detergents portfolio within Fabric Care has actually grown at a higher rate than the overall Fabric Care business. And if my assumption is correct, I just wanted to understand what has led to this sudden spurt in growth? I mean it was not so high in the last few quarters. So is there some sort of adjustment in the pipeline that we need to do to understand what is the underlying sustainable growth in this -- for the next couple of quarters?

Yes. Percy, the thing is it's not just Detergents for us as Ujala Supreme also has grown in double digits. We also have a Crisp & Shine, which has got beaten badly during the COVID times, that has done well. So it's not just Detergents, it is the Post Wash also, which has contributed to the overall Fabric Care. And Detergents, yes, have done well. The lower unit packs have done well. The larger packs in big stores have done well. So it is across the geography, across brands, we've been doing really well and have been maintaining the market share more or less.

And do -- is there any difference in the primary versus secondary this quarter in fabric wash?

There's nothing. Secondary, primary are same.

So in that case, what I just wanted to understand is that this kind of growth that we have shown, if there is no one-off or anything, is that something that same percentage growth Y-o-Y? Is it sustainable over the next couple of quarters, at least? And if not, what is the reason for the same?

See, we will definitely see a double-digit growth, and we are happy that our premium sales also have bounced back, and it has been consistently doing a double-digit growth as well. So right now, I can only say that we continue to wish that this -- all our efforts are behind the brands. We have been investing behind the brands. And our effort is definitely to do better. I'm not sure of the kind of percentage that I can put this thing, but definitely a double-digit growth is what we are looking at.

Understood. Secondly, on the Personal Care portfolio, on a Y-o-Y basis, I'm sure there's a significant amount of price increases sitting in that. Despite that, the sales growth is only some 10%, 11%, which means that volumes might be negative. So -- and despite being such a small player, I mean, we have so many drivers of growth, levers of growth. Wouldn't you say that the growth here should have been much higher?

See, yes, like you said, there have been several price increases which have happened. While I'm -- while that has happened, our volumes have not dipped. I would say it is somewhere around 1% sort of a thing. So it's not negative, it's slightly better than flat. But because of consistent price increases, obviously, the consumers, I think overall, in general, it has definitely taken some impact. But going forward, if things are better, we would pass on the advantage to the consumers and we'll see -- definitely see volume improvement there.

So Jyothy, my impression was that in the soaps category, the Y-o-Y pricing is in double digits. So is my impression wrong? Or is it that in Margo, you have sort of consciously taken lesser price increases than the industry?

No, we have taken price increases. I literally forgot how many rounds of price increases have happened that definitely. So if you are a consumer, you go to a shop, you would see Margo at many different price points that definitely has created some sort of issues also in the sense from a consumer point. If you -- Margo available at some 2, 3 prices, different price points, which has actually moved, definitely that has impacted the volumes. But going forward, we don't see any more price increases happen rather we would pass on any advantage that comes out of softening of the raw materials. So yet to happen, but we'll see that that will be passed on.

Okay. Okay. And last question for me for next fiscal, what kind of EBITDA margins would you be targeting as a company overall?

Percy, as this quarter is, we've done some sequential improvement in the margins. Very tough to put a number for now given the SKU mixes we have and the raw material prices the way they are behaving. So for now, we can only comment that, yes, sequentially they should be improved, and we would love to go back to our earlier margin profile of 15% or about, but we'll have to wait for that.

[Operator Instructions] The next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas.

My question is again on the Detergents front. I just want to understand, is it because of the downgrading our bid premium and low price products again this quarter, and that's why the growth in Detergents segment was much better in this quarter and that might be not the case once this inflationary scenario tone down and growth will normalize over the next maybe 2 to 3 quarters.

See for us this has not just been -- it could not be completely the down gradation that you're talking about. We have also increased our distribution. We have reached many more retail outlets. And it's also the lower SKUs, the lower unit packs that has done well. And it is different for different brands across geographies. So it will be too early to conclude whether it is only down that has happened. But we would -- we will, going forward, try hard to maintain the double-digit growth in Detergents business.

And what is the lower unit packs contribution to -- for our Detergents segment for Fabric Care? And what will be it for the entire overall product portfolio for us?

Yes, it's around 35%.

For Detergent? Or for the entire...

For Detergents.

Okay. And my second question again is on the margin. So -- as this first half, we have seen margins to be at around 11% to 12%. We have seen most of the -- we have heard from most of the companies they are expecting margins to sequentially from quarter 4 -- from quarter 3. And by Q4, they are expecting their margins to come back to their historical level. So for us, are we looking at the same trend or it will take some time for us to recover back to around that 15%, 16% kind of margins?

So Kaustubh, we would also expect similar trajectory to happen for us as well, where in the Q4 onwards, sequentially, the margin should improve. But we were expecting sort of raw material prices to improve or soften, but they haven't been in the last few months. So they've fallen off from their peak, but they still remain quiet and so we are also on the same school of thought, but let some early signs confirm that.

Okay. And one last on the distribution. Currently, what is our distribution reach and by -- maybe end of '23 and '24, where are we targeting our distribution to be?

See recently, we reached 1 million outlets directly; and overall, around 3 million in the both direct put together. We have our internal targets obviously, would want to increase the distribution much more.

[Operator Instructions] The next question is from the line of Amit Purohit from Elara Capital.

Congrats for the numbers. Sir just want to check on the liquidity conditions in the market, especially when I look at both trade receivables for us has been higher even if I look at it from, say, pre COVID or during COVID also from there also, it has gone up. Are there any challenges the distributors are facing? Or...

So Amit, good question. See this -- for us has been slightly higher one because of the institutional business. Nothing alarming, but marginally, they have been on the higher side. On the side of the -- what you mentioned about the distributors, see when they are also facing these inflationary pressures and for the working capital, they have to deploy. If the goods finally, what they are selling is more by 10% or 20%, then it also blocks an equal amount of working capital at their end. So we haven't seen any pressure from distributors. But yes, the overall business cycle in which they all operate where the volumes are not growing much, definitely impacts them. But nothing on the receivables for us, the entire general trade business is on cash and carry.

Sure. And on the inventory side, this is largely because of the high cost of inventory, right?

Yes, the high cost of inventory, a higher level of scale of operation from last year, to some extent on the HI, the inventory, which is coils and all, obviously, one has to make. But if it doesn't pick up, then obviously, it goes on the next season. So a combination of these factors has been on the -- for the inventory rise.

And lastly, how has been the demand now in HI because we understand that there was a delayed monsoon. So hence October was probably a good month. Is that what you also experienced, if you could...

So as of now, it's looking fine, but too early to say that.

So I mean, fine in the sense, are you able to regain the loss thing or it is just as usual, business as usual?

No that's a huge loss that has happened. See, mosquito has been -- we have 2 big seasons that is usually the Jan quarter and the Feb-March the JFM quarter, these are the 2 big quarters. So if you miss these quarters in terms of season, then obviously it's difficult to catch up on that. But having said that, we are still hopeful that maybe this year is an aberration and the season come back next year.

The next question is from the line of Manoj Menon.

Quickly 3 different questions over here. One, there is a comment in your presentation about the demand conditions being positive, which was very pleasing to see, and you appear to be an outlier in terms of saying that the demand conditions are great. So when I look at your performance of 5% volume growth, which is definitely industry-leading, is it just a case of you actually executing better? Or you do think actually that the conditions are positive and you have tailwinds, et cetera. And if yes, please elaborate that will be helpful.

It's basically -- when you look at our business, the efforts which have been built, put in, which is brand investments, the distribution drive, the expanded distribution and being able to have a very balanced portfolio across subcategories and price points. So I think when we look -- put all these things together is we see the business doing okay for us or well for us. And there are challenges, no two doubts about it. But as we move along, the festive demand has been okay. We are seeing some good pickup, partly offsetting the inflationary headwinds. So we are seeing all these things in this macro perspective, and we hope that for our business, for the portfolio we have, we should be able to deliver our target of double-digit growth.

Okay. Understood. Sanjay, one follow-up on -- okay, maybe not actually I'll ask you separately. On working capital, so there's some increase in working capital. If you could just help us understand, is it raw material finished goods? What exactly is the -- or is it just a seasonal thing?

So I think -- there's a question before with Amit. The working capital days, they marginally increased because of a slightly higher inventories, receivables is more on the institutional business and inventory is on the higher scale and higher cost of whatever raw materials and FG and to some extent marginally on the HI inventory as well. But these all will be fine, we don't expect it to be at these levels. On a -- for the last -- long period of time, we have been managing it between 20 to 22 days. So hopefully, we'll be in that range soon.

Sure. And third, some qualitative and possibly quantitative performance commentary about Henko with some detailing, if at all possible, would be helpful. Trying to understand -- what I'm trying to understand is, let's say, if I look at the Unilever commentary, it is very clear that it is premium detergents within that Surf within that the LUP. So there is a level of YV analysis, which tells us that what is the driver for growth. Is it fair to say that premium at least as per Unilever appears to be outperforming the other segments of growth. Your drivers of growth is mid-segment. And you do have a key brand proposition in Henko. There is attempts made in the past, significant attempts rather, with investments, et cetera, to rejuvenate Henko. Now as a consumer, when I observe at least it's a perception, maybe an anecdotal perception that it is all Surf and not much of Ariel or limited Henko to be seen. So just some color on where we are in the journey with Henko, qualitative and quantitative will be super helpful.

So Manoj, Henko has been doing good. And as you know, it's on the premium side of it, and we launched the Matic, which has done well, it's a pan-India brand. Seeing the demand trends on the consumer preference for liquid, the liquid was launched. So as of now, yes, -- in our overall portfolio, this is at the premium end of the business, obviously, for more metros and modern trade type of channel. And it's doing well. And we have brand ambassador Kajal Agarwal there. And things have been doing well for us. So I think we'll restrict, I mean, our comments to that.

Okay. Okay, sir. Now one last thing, and I'll get back in the queue again. When I look at the ad spend, INR 86 crores versus INR 83 crores last year. Should I think of ad spends the way you are looking at it in terms of absolute or because of the revenue growth being so strongly price led, there is significant kind of, let's say, 100-odd bps reduction. So should I look at it as a percentage of revenue, how are you looking at it? Or is it more like an absolute modeling which you're doing?

Manoj, it has to be looked at absolute. And when we drop our yearly AOP obviously, one looks at it on a percentage basis also. But as of now, I think we have been in the environment in which we're living. I think we're doing a fair degree of brand investments.

Sure. And one quick follow-up on this is, is it suffice to say that in all the categories you are SOV/SOM is favorable?

Yes, more or less. It depends on geography, regional and Hindi speaking, it would differ. But more or less, we are there.

The next question is from the line of Pathanjali from Mirabilis Investment Trust.

Sanjay, congrats on the results. I just wanted to know what is our volume and value growth for the Detergent business or the Fabric Care business as a whole?

So volume growth is around 20-odd percent, and the balance will be the price growth.

Okay. Is that right, 20-odd percent you said?

Yes.

Yes. And any plan for NPD for the current year because I think last year, we didn't do much NPD. Anything in the pipeline?

Yes, there are something in the pipeline, but we'll -- it's a part of the next year.

Okay, ma'am. So nothing for the current year, is that right?

Current year, in the beginning of the year, we had launched Henko liquid, liquid detergent. And we'll be launching and then doing our investments on that, reach a certain scale and then launch the next. So that's our principle. So we have launched Ujala IDD liquid detergent and Henko liquid detergent just about 6 months back.

Okay. And I think based on our inventory levels, it will take us about 2 months for us to roughly get on any cost benefits that come from softening commodity prices. Is that right?

Yes, that's right.

[Operator Instructions] Next question is from the line of [ Shreyansh J ] from Swan Investments.

Just wanted to understand, ma'am when we talk about LUPs, so our understanding was LUPs' gross margins are significantly lower than your normal larger packs. But still, if you look at this quarter, instead of selling almost LUPs in most of our product categories, we've been able to hold the gross margin. So is the understanding correct here?

So at the company level, when we have LUPs, one manufacturing is our in-house so it does not impact us that much. But we see LUPs more as our investment and our way to get into new consumers. So we see as a good -- if you are able to increase our LUP share, it gives good result in the long term. And the margin level, it does not impact that much at the category level.

Okay. Okay. All right. And the second question is, would we be largely done with the high cost RM? Or do you think like Q3 would be the last quarter where we'll be able to use that. And post that will you see some relief in your margins or improvement in the margins?

I mean the earlier question was any inventory. What we have, it takes at least 2 or a quarter actually for it to and the new pricing comes in. But even if we look at this point of time also prices of soda ash, some of the raw materials are still at a very elevated levels. So -- but too early to call it that they have come off from the peak, but they're still at high levels for some of the raw materials. Some of them have come off. Your palm oil prices have come off, but rates are still at the same levels.

Okay. But just to get a sense in the margins, do you think we have reached the trough in some sense. I'm not asking for any guidance, but just to get a rough idea of where we are and there's only one way up from here on?

Yes, we definitely hope that is one way, but life is generally not that way. So we hope things will improve from here on, and that's what we are expecting this quarter. Sequentially margins have gone up, and we hope things will fall in the same trajectory or the upper trajectory only.

Okay. And just my last question. Sir, just broadly, fundamentally, I just wanted to understand, we're seeing growth of about 20-odd percent in volumes in Fabric Care, whereas soap, you just said 1% volume. So what is the psyche of a customer like is he not willing to buy soaps or rather spend on Fabric Care? Or do you think it's more about competition in the soaps category where Margo faces a lot of challenges from other brands, and it becomes difficult to sell those products in that category. So just trying to understand, is it that the competition is impacting? Or is it that the customer has not been actually able to purchase soaps at a cost of Fabric Care?

So the thing is, this is the number of brands in Personal Care that is the soaps category. It's way too many. And we have a single brand that is Margo. While for us in Detergents, we have multiple brands, and we have pockets of strength when you map India, we have different brands are doing different -- doing well in different pockets of the country. So it's a summation of that that's working for us.

[Operator Instructions] Next question is from the line of Harit Kapoor from Investec.

This is Bhakti Thacker. Am I audible?

Yes, you are audible.

Yes.

Dishwash, we have seen some lower growth versus the past few quarter trends that we have seen, is the volume growth positive here and any specific reason for this lower growth versus historical level?

Yes. So for us, generally, the Jan quarter is the biggest quarter. And last year, we had a heavy base on it. While we talk about Dishwash, we have gained market shares as well. So there's -- it's a temporary this thing, the brand is -- both the brands are doing really well.

Okay. Great. And my second question was on tax rate. So what would be our tax rate for this year and the next year?

So we can give around 16% to 17% on an annualized basis.

Okay. And last a bookkeeping question. So for us, how big would be Ujala Supreme contribution to our Detergents segment?

Which one is that?

Ujala Supreme.

We don't give any specific brand-wise numbers, ma'am, so we'll leave it at that.

I'm not asking for the growth for this quarter, I'm just asking the sales contribution from this brand to our overall sales or even Detergents sales.

So overall, as a company-wide basis, Ujala Supreme will be around 10-odd percent.

[Operator Instructions] Ladies and gentlemen, that would be our last question for today. I now hand the conference back to the management for their closing remarks. Thank you, and over to you.

Sure. Thank you very much. And if there are any questions, please reach out to us or I-Sec team, and we'll be more than happy to answer any questions you guys have. And thank you once again. Goodbye to you till next time.

Thank you very much. Ladies and gentlemen, on behalf of ICICI Securities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.