In its most recent research note, domestic brokerage firm Sharekhan kept its bullish outlook on leading FMCG player Jyothy Labs, citing the sharp decline in crude oil prices as a positive factor for the company's margins.
The brokerage firm pointed out that the recent correction in the stock price has created a favorable opportunity to enter the good stock within the small-to-mid-cap FMCG space, which offers good earning visibility in the medium term.
Jyothy Labs is in a relatively comfortable position as falling crude prices bode well for margins, while extreme summers may aid in the recovery of household insecticide (HI) sales in the coming quarters.
The company's operating profit margin reached 16% in FY2021 due to lower input costs and a better mix, but in Q1 FY2022, it fell to 10-12% due to a spike in crude oil and another input cost, along with rising freight costs.
However, with crude prices correcting since Q2FY2023, the OPM improved sequentially to 13.8% in Q3FY23, and it is expected to further improve in the coming quarters, the brokerage noted.
"The expectation of extreme summers might lead to high mosquito infestations, resulting in higher demand for mosquito repellants in the coming quarters." "Thus, after a year of lull, we should expect a recovery in the sales of HI products in the coming quarters," said the brokerage.
Besides, the new product launches, along with extending its recent launches to new markets and expanding the distribution network, will help the company to gain market share in key categories, it added.
Despite input price inflation and a slowdown in volume growth, the company has recorded relatively better broad-based performance in recent quarters (especially in rural India).
Going forward, the brokerage anticipates that lower raw material prices, such as crude oil and vegetable oil, will help margins improve consistently in the coming quarters. Overall, the brokerage anticipates that Q4 FY23 will be better than Q3 FY23.
In light of all growth factors, the Sharekhan has retained its "buy" rating on the stock with an unchanged target price of ₹240 apiece, which reflects an upside potential of 27.65%.
In the October-December quarter, Jyothy Labs delivered a strong performance, with its net profit growing to ₹67.39 crore, an increase of 77% YoY from ₹38.02 crore in the same period last fiscal.
The consolidated revenue from operations came in at ₹6,126.7 crore during the quarter, compared to ₹5,390.3 crore in Q3 FY22.
Jyothy Labs is a mid-cap stock with a market capitalization of ₹6,900 crore. The company is engaged in the manufacturing and marketing of fabric care, dishwashing, personal care, and household insecticide products.
The company has a leadership position in the fabric whitener category in India, whereas it ranks number two in the dish wash bar, liquid, and mosquito repellent coil categories. The company’s flagship brand, Ujala, has remained at the top of the fabric whitener category since its launch, with an 80% market share.
Nine analysts polled by MintGenie on average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.