Jyothy Laboratories’ margins benefit from lower material costs in Q2

Net sales rose by 9% from a year ago to <span class='WebRupee'>Rs.</span>400.7 crore in the September quarter. Photo: Bloomberg

Jyothy Laboratories Ltd’s September quarter results show volume-led sales growth, with no help from price increases, but lower material costs pushed profitability higher. Its net sales rose by 9% from a year ago to Rs.400.7 crore in the September quarter. This was higher than the 7.5% growth reported in the June quarter.

Soaps and detergents segment contributes to around two thirds of Jyothy Laboratories revenues, and it grew by 7.3%. This was slightly lower than the June quarter’s growth. Sales in its home care segment, which contributes to one-third of sales, grew by 16% (over thrice the June quarter’s growth) due to seasonally higher revenues from selling mosquito repellents.

Volume-led sales growth is because companies are cutting prices to pass on the benefit of lower costs to customers. Volume growth for consumer companies will be higher or equal to value growth, according to Tejas Shah, an analyst at Spark Capital Ltd.

But market conditions are difficult. “Demand is softening and market looks tough. We are working towards increasing market share and looking at achieving 10-12% sales growth in FY16, without any price hikes,” said Ullas Kamath, joint managing director and chief financial officer of Jyothy Laboratories.

Growth in the urban market was around 12-15%, but rural growth was slower at 5-6% because of bad monsoon and lower social spending by the government.

Lower prices of oil and crude oil derivatives resulted in raw material costs as a percentage of net sales declining by 3.7 percentage points to 48.5%. Jyothy Laboratories’ advertising and promotion costs rose by only 5%, which allowed cost savings to flow down to its margins. That led to its operating profit margin rising by 300 basis points to 13.8%. A basis point is 0.01%. Operating profit jumped by 44%, leading to net profit growing by 54.3% to Rs.38.8 crore.

Jyothy Laboratories’ shares have rallied 14% since August-end, and are trading at 36x one-year forward price-to-earnings multiple. That increase appears to have already discounted the margin expansion visible in its results. But rumours of Henkel AG and Co. KGaA’s re-entry into the company, by exercising its call option of purchasing as much as 26% stake in the company in FY17, may keep investor interest high.

[“source -livemint”]

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