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Jyothy Laboratories -Expanding on existing brand equity…
Leveraging on its strong brand equity of ‘Ujala’, Jyothy Laboratories
(JLL) has diversified from a single brand and single product into a multiproduct company. Remaining a niche player in segments (liquid whitener, fabric enhancer, mosquito repellent coils and dishwashing
bars), JLL’s brands (Ujala, Maxo and Exo) have grown at a CAGR of
25.8% from FY08-10. With the extension into detergents, aerosols and
fabric wash we believe the company would continue to grow at a CAGR
of 19.6% from FY11-13E. We are initiating coverage on the stock with
an ADD rating.
ƒ Extension of brands to drive revenue growth
Capitalising on its brand equity in Ujala (72% market share) and Maxo
(21% market share), JLL has expanded its portfolio to washing powders,
fabric enhancer, aerosols and outdoor mosquito repellent products. The
increasing demand for these products and the company’s aggressive
marketing initiatives would be key drivers for the brand’s performance.
The venture into the niche fabric wash segment through JFSL, that has
relatively less competition and attractive opportunity, would further help
JLL to witness the expected CAGR (FY11-13E) of 19.6%.
ƒ Margin concerns to prevail
Rising material costs (especially crude that has touched $92/bbl) and
increasing advertisement expenses (from 8% in FY10 to ~9.5% in FY11E)
for the promotion of its new products and launching products nationally
would continue to keep margins lower at ~15%. Moreover, with
intensifying competition (especially in detergents and coils that are highly
price sensitive) pricing would be a challenge to maintain sales (volume)
growth. Higher operating margins (~36% as in FY10) in JFSL could also
get trimmed with increasing competition due to the attractive valuation.
Valuation
At the CMP of |276, the stock is trading at 25.1x its FY11E EPS of |11 and
21x its FY12E EPS of | 13. With the company’s expansion into detergents,
fabric wash, aerosols & outdoor repellent products, we have valued the
stock at 22x its FY12E EPS, arriving at a fair value of | 292. Also, on
comparison with the FMCG Index, JLL is trading at 21.4x its FY12E EPS
while the FMCG index is trading at 27x its one year forward earnings
(estimated). With JLL being a relatively smaller player and in its nascent
stage, we believe the discount of ~20% to the index is justified. We are
initiating coverage on the stock with an ADD rating.
Company Background
Jyothy Laboratories Ltd (JLL) is the market leader in the niche fabric
whitener category with its flagship brand ‘Ujala’ (market share by value of
72% in FY10). It is also present in the household insecticide and
dishwashing segments through two other brands Maxo (market share by
value of 21.2% in FY10) and Exo (market share by value of 23% in FY10),
respectively.
JLL commenced its operations in 1983 led by MP Ramachandran. Initially,
it was a proprietary concern with a team of six sales people who sold
Ujala going house to house in Trichur and Malappuram districts in Kerala.
However, over the years, the company has successfully grown by
expanding its reach throughout the country as well as entering new
segments.
• In 2000, Jyothy entered the household care segment and
launched its mosquito repellent brand ‘Maxo’ and dishwashing
brand ‘Exo’ in West Bengal and Kerala, respectively
• In 2001, it introduced its brand Maya (incense sticks) in selected
states in the country
• In 2002, JLL acquired Sri Sai Homecare Products Pvt Ltd, a
mosquito repellent coil manufacturing facility in Hyderabad and
during the same year launched its ayurvedic soap brand Jeeva
• In 2005, the company introduced Exo Liquid and Ujala Stiff &
Shine (fabric enhancer) in South India. Further, in 2008, it
launched these products across the nation
• In 2009, JLL forayed into the laundry service segment and set up
its new venture Jyothy Fabricare Services Ltd (JFSL) with the aim
of providing “world class laundry at affordable prices at one’s
doorstep” both to retail and institutional categories. Currently,
JFSL’s operations are restricted only to Bangalore.
Over the years, JLL has grown at a CAGR of 18.6% from 2006-10 with the
sales in FY10 being | 598.1 crore. Ujala is the leading brand in the
company’s portfolio and contributes 45.6%* (| 264.2 crore in FY10) to the
topline, followed by Maxo contributing 30.8%* (| 178.8 crore in FY10),
Exo 16.4%* (| 95.3 crore in FY10), JFSL ~0.8%* (| 4.7 crore in FY10) and
around 6.3%* (| 36.6 crore in FY10) followed by others (Maya and Jeeva).
Investment Rationale
Brand extensions and geographical expansion to drive revenue growth
Expansion of Ujala’s portfolio to drive brand’s growth
JLL’s flagship brand Ujala comprises whiteners, detergents and fabric
enhancer in the product portfolio and constitutes ~44% of JLL’s total
sales (FY10). The brand has grown at a CAGR of 17% from 2007-10.
Going ahead, we expect the growth (CAGR) to be ~19% in 2010-13E. The
growth would be led by detergent (~34% CAGR FY10-13E) and fabric
enhancer (~12% CAGR FY10-13E) sales with the growth in liquid
whiteners remaining muted.
Ujala Supreme
Ujala Supreme, the fabric whitener, is the main offering of the company
contributing ~30% (| 183.2 crore) to JLL’s topline and ~70% of Ujala’s
sales. It has an overall market share of 72% by value (FY10) and the entire
market in Kerala (the company’s largest market for all its products). The
closest competitor for this product is Robin Blue having a mere 4% share
by value (FY10). Ujala Supreme has grown at a CAGR of ~4% from 2008-10. We expect it to grow at ~14% (CAGR) from 2010-13E. The higher
estimated growth is on the back of ~15% price increase taken in FY11E
though we believe volume growth (CAGR FY10-13E) would remain
at~6%.
Ujala Detergents
Leveraging on the brand equity of Ujala Supreme, JLL entered the
detergent segment (market size of | 12,000 crore in FY10) and launched
Ujala washing powder in Kerala in 2001. It has categorised the detergents
into two variants, Ujala washing powder (80% of detergent sales priced at
| 54/kg) and Technobright (20% of detergent sales priced at | 90/kg),
targeting the economy and premium categories, respectively. Having test
marketed the product in Kerala (garnered a market share of 17% by
volume in FY10), the company launched the product pan-India in August,
2010.
We expect detergents to grow at CAGR of ~34% (volume growth of 35%)
from FY10-13E backed by the company’s strategy of avoiding the
overlapping segments of market leaders (HUL and P&G). Moreover, with
the marketing initiatives taken by the company, signing Sachin Tendulkar
(high brand equity in rural areas) as the product’s brand ambassador and
increasing its advertisement expenses by ~132% in H1FY11 for Ujala
(especially detergents) alone to |11.6 crore to increase its penetration and
fight competition from the smaller players (Ghari and Nirma), we believe
the expected growth of ~34% would be achieved.
The company is also looking for inorganic expansion (targeting regional
players) in the detergent segment (not accounted for in the estimated
growth) and has raised | 228 crore via QIP for the same. It is in advanced
talks with Safechem Industries (West Bengal based player) to buy its
detergent brand Safed.
Ujala Stiff & Shine
The smallest contributor (6% by value in FY10) to Ujala’s sales, Stiff &
Shine (fabric enhancer nationally launched in Q3FY08) has grown at a
CAGR of 6.8% from 2008-10. Going forward, we expect it to witness a
CAGR of ~12% from FY10 to FY13E. With the increasing demand for
products that safeguard the quality of clothes, appropriate distribution
and marketing of the product would help JLL to achieve the targeted
growth and create a market for the product (it being a niche and new
concept with no competition).
Thus, with ~15% growth among all products under the brand, led both
by volume and value we expect Ujala to continue to be the largest
contributor to topline (~44% in FY13E), going ahead
Growth in Maxo sales to be driven by introduction of aerosols, DEPA products
Maxo, the second largest brand by sales (| 178.8 crore in FY10 and
contributing ~30% to topline) for JLL grew at a CAGR of ~26% from
FY08 to FY10 garnering an overall market share 12% by value in the
mosquito repellent category (market size of ~| 2000 crore). However, it is
the market leader in rural India with 32.4% share by value (FY10). With
the company introducing Diethyl Phenyl Acetamide (DEPA) products and
aerosols in its product portfolio from FY11, we expect overall growth for
the segment to be maintained at around 22% (CAGR) from FY10-13E,
thereby reaching | 324.6 crore by FY13E from | 178.8 crore in FY10.
In March, 2010 Defence Research & Development Organization (DRDO)
assigned JLL the exclusive rights to develop and sell its DEPA (multi
insect repellent technology) products in various formulations (through its
established brand Maxo) in Indian and International markets. The
technology aims to provide repellent solution for outdoor use as all
products in this category have been predominantly for indoor use
(Odomos). In exchange for the technology, JLL is required to pay a
royalty fee of 2% on domestic sales, 3% on sales in military canteens and
4% for exports.
With the company’s usual practice of test marketing its products in
Kerala, DEPA products were launched in Kerala on July 16, 2010 and are
expected to be introduced nationally in January, 2011. JLL being the sole
owner of the technology (with relatively no player in the outdoor
mosquito repellent products), we expect the sale from these products to
witness a CAGR of ~100% and reach | 80 crore by FY13E from | 20 crore
in FY11E (including the sales to GoI for CWG and ~| 1.5 crore per month
sales from Kerala). With the national launch of the product, we expect
sales of around | 1.5 crore per month from all-India for January-March,
2011.
Aerosols and sprays (market size as of FY10 was | 260 crore) are the new
products in Maxo’s portfolio. The margins from aerosols are higher than
from coils at ~20% and ~6%, respectively. Therefore, with the increased
marketing efforts of the company and higher opportunity backed by
relatively less competition in the category, we believe that contribution of
aerosols in Maxo’s portfolio would increase to ~25% by FY13E from 10%
in FY10 clocking a CAGR of 50% from FY10-13E. With the huge
opportunity in the aerosols market, competition would intensify in the
coming years especially from the market leader (Godrej with 33.1% share
as of FY10). However, we believe JLL’s strong brand equity and rural
presence would help it to maintain its sales growth.
In spite of tough competition in the coils market from industry leaders,
Good Knight (Godrej’s brand having 21.4% share as in FY10) and Mortein
(Reckitt Benckiser’s brand having 32% share in coils segment as on
FY10), Jyothy maintained its market share (by value) over the years (at
21.2% in FY10) with others witnessing a loss in share. The large players
are facing tough competition from the smaller/unorganised players who
are increasingly gaining pace through their low cost strategy. Thus, with
increasing competition in the coils segment and consumers (largely rural)
shifting their usage to electricals, aerosols and creams (JLL’s presence in
this category is relatively very low), we believe JLL’s move to tap the
opportunity in these faster growing categories would help it in
maintaining its market share.
Exo sales to be driven by increase in rural contribution
Exo (dish wash bars and scrubbers) constitutes the dishwashing category
of JLL and contributes 16% (| 95.3 crore) of total sales (FY10). The brand
has witnessed robust grown of ~53% (CAGR) from 2007-10. Going
ahead, we expect the growth (CAGR) to be ~20% from FY10-13E. With
relatively low penetration for utensil cleaners in rural India (~17%)
compared to urban India (~60%), we believe the growth would largely be
driven by contribution form rural consumers. Also, with Exo’s national roll
out in January, 2010, the company has been able to increase its market
share to 23% (FY10) from 17.6% (FY08) with the market leader Vim (HUL)
losing market share to 61.6% (FY10) from 69.5% (FY08). However, with
Vim sales still being almost 3x that of Exo, JLL’s marketing strategy for
the brand would play a crucial role.
Going ahead, with the increasing penetration of dishwashing products in
the country (at around 35% in FY10) and the strengthening of the
company’s distribution network (from 3.5 lakh retail outlets in 2008 to ~10
lakh outlets in 2010), we expect the sales to increase to | 163 crore by
FY13E from | 95 crore in FY10 and the overall market share to increase to
~35% contributed largely by the rural economy
Diversification in Maxo’s portfolio, rationalisation of costs in Ujala to
improve margins
JLL’s introduction of Maxo aerosols in the brand’s offerings would
expand its margins from the brand as margins from aerosols are ~20%
compared to coils that have ~6% margin (in FY10).
Maxo contributes ~9% (FY10) to JLL’s margins (| 91.8 crore in FY10) with
margins being ~6% (FY10). With the extensive marketing undertaken by
the company (increase in advertisement expenditure for Maxo in H1FY11
by 132% from | 2.01 crore to | 4.67 crore), we expect the contribution of
aerosols to increase from around 10% in FY11E to ~25% by FY13E. The
increasing contribution would, hence, improve margins from Maxo by
140 bps to ~7.5% in FY11E and by 350 bps to ~9.5% by FY13E.
JLL modified the packaging of Ujala Supreme (75 ml bottles – largest
selling SKU) by reducing the grammage of its bottles (75 ml) from 18 gm
to 8 gm, subsequently leading to cost savings of | 0.5 per bottle and
increasing margins by 3% from it. The driver for this change was the
rising HDPE (crude derivative) prices, the key packaging product used by
JLL.
Entry into niche fabric wash category through JFSL
JLL ventured into the untapped laundry segment (estimated market size is
| 2000 crore by KPMG and INSEAD Analysis in their report, 2007-12:
Outlook for Dry Cleaning and Laundry Services) in November, 2009 in
Bangalore. By the end of FY10, the company has processed 28,000 pieces
per day generating ~| 5 crore by the end of FY10. Led by increasing
household income, growing working population, aggressive expansion
plans of the company and the competitive advantage of being the sole
player in the segment, we believe the sales would grow at a CAGR of
~140% from FY10-13E clocking sales of | 68 crore by FY13E.
JFSL has been formed with JLL holding a 75% stake and 25% being held
by Ullas Kamath (managing director of JLL). The cost of the venture was
~| 35 crore. JFSL owns a laundry facility in Bengaluru with a total
capacity of washing ~40,000 pieces a day. JFSL acquired a Bangalore
based laundry services chain ‘Snoways’ with eight outlets in November,
2009 and has increased it to 30 stores. The company also launched the
‘Fabric Spa’ JFSL’s flagship brand on November 15, 2009 with two quick
service stations and 10 collection and delivery centres.
JFSL caters to both the retail (10% by volume and 20% by value for
FY11E) and institutional categories (90% by volume and 80% by value as
on FY11E). The margins from the retail category (~60%) are higher than
the institutional category (~30%).
With JFSL being assigned the official launderers for CWG, 2010 and
already (by the end of Q2FY11) processing ~38,000 pieces (~3500 in
retail and ~34,500 in institutional), we expect the company’s revenues
from JFSL for FY11E to be ~| 17 crore. Going ahead, JFSL plans to
extend its operations to Chennai, Hyderabad and Pune in Phase 1 by
FY12 and to Mumbai, Delhi and Kolkata between FY12-15. We estimate
the sales from JFSL will witness a CAGR of ~100% from FY11E-13E
taking into account the expansion plans (of phase 1 only and add to
revenues from FY12E) too. We believe that the total cost of expansion
(Phase 1 &2) for JFSL would be ~|200 crore based on the same scale of
cost that was expended for setting up the Bangalore facility; which could
be could be funded through selling off JFSL stake (of JLL) to a private
equity player or through internal cash accruals
Extension of flagship brands through acquisitions
JLL has followed the inorganic route of expansion since its inception with
all acquisitions being funded by the company’s internal accruals.
Recently, the company ventured into the fabricare services business in
2009 by acquiring ‘Snoways’ chain of laundry in Bangalore operating with
eight stores, which it increased to 30. The company plans to continue its
presence in the fabricare space and recently raised | 228 crore via QIP
(issued 80, 67,370 shares of face value | 1 shares issued at a premium of
| 281.6 per share) for the same purpose. Having raised the money, the
company has plans to acquire a regional detergent brand ‘Safed’ in
eastern India (West Bengal).
Risks and concerns
High dependence on flagship brand Ujala
We believe that the entry of detergents with better formulations would
gradually wipe off the market for liquid whiteners and the price war
concerns in the detergent segment would increase pressure on the
company to operate on lower margins and face tough challenges in
maintaining its market share.
With JLL’s 31% sales coming from Ujala Supreme (fabric whitener) and
11% sales from Ujala detergents, the slightest deviation in their sales
would adversely impact JLL’s topline. With Ujala being the highest
contributor to EBITDA (~90% in FY10), an impact on the sales from it
would also hit the margins.
JFSL’s performance to temper down
JFSL’s expansion plans is estimated to require ~| 200 crore
(management estimates only | 150 crore) considering the investment of |
35 crore in setting up a single facility in Bengaluru in November, 2009.
With operations in Bengaluru alone not having achieved breakeven even
after two years of operation, the aggressive expansion plans look
stretched.
Moreover, with the intentions of the company to increase JFSL’s
contribution to JLL’s topline to 25% by FY13E, revenue per city would
have to be ~| 80 crore (considering the expansion plans of Phase 1 will
be completed by FY13E). This seems quite stretched based on the
performance in Bengaluru till date. The higher margins of ~30% from
institutional segment and ~60% from retail (blended margin of ~36%)
would not sustain in the long run with competition from unorganised
players pouring in. With an increase in the cost of processing passing on
the costs to consumers could impact the volume growth.
Rising raw material and advertisement costs to pressurise margins
Rising crude prices to $92/bbl in January, 2011 from ~85/bbl in January,
2010 leading to increase in prices of HDPE (crude based derivative) and
plastic (~20% of JLL’s raw material costs for manufactured goods as of
FY10) would impact JLL’s margins by ~200 bps (FY12E). Thus, any
further increase in crude from would further lead to margin contraction.
We believe that with the introduction of detergents, aerosols and targeted
growth in Exo & JFSL would keep advertisement expenses higher at
~9.5% of net sales (FY11E) at | 68.3 crore against 8.1% in FY10 at | 48.5
crore. JLL’s advertisement costs were already higher by ~98% in H1FY11
at | 20.8 crore against | 10.5 crore in H1FY10.
Financials
Sales to grow at 19.6% CAGR from FY11-13E
JLL’s sales grew at a CAGR of 18% from FY07-10 to | 598.1 crore (FY10).
We expect it to grow at 19.6% from FY11E-13E to |1029.2 crore (FY13E).
Ujala - Higher sales growth would largely be accounted by the increase in
Ujala sales at ~16% CAGR from FY11E-13E to | 448 crore (FY13E) against
15% CAGR from FY08-10 to | 264 crore in FY10. We expect Ujala
detergents & S&S sales to witness ~35% and ~12% CAGR from FY11-
13E.
Maxo - CAGR growth in Maxo sales is expected to be ~22% (FY11-13E)
against ~8% CAGR from FY07-10 and reach | 325 crore (FY13E). The
growth (CAGR) in aerosols and DEPA products is expected to be robust at
~75% (| 61 crore by FY13E from | 20 crore in FY11E) and 100% (| 80
crore in FY13E from | 20 crore in FY11E).
Exo - Exo grew at ~53% CAGR from FY07-10 (| 26 crore to | 95 crore)
witnessing robust growth (~71%) in 2009 when it was launched
nationally. Hence, we expect the growth (CAGR from FY11-13E) to
moderate to 17.5% (due to the high base effect) but remain higher than
the category growth rate of ~13% (FY10).
Also, increasing sales of JFSL at ~100% CAGR (FY11-13E) would
marginally contribute to the growth.
Margins to remain under pressure
We expect margins to remain under pressure from FY11-13E at ~15%
(declining by 50 bps in FY11E to 14.8% from 15.3% in FY10). Rise in
crude prices to ~$92/bbl would increase the cost of HDPE (crude
derivative) and plastic (both constituting ~40% of raw material cost for
manufactured goods). Moreover, the extension of the brand’s portfolio
and launching products nationally would increase the advertisement cost
(FY11E saw 9.5% of sales compared to 8.1% in FY10) pressurising
margins further.
Profitability growth to moderate
We expect bottomline growth from FY11-13E to grow at a CAGR of 19.7%
to | 127 crore against 23% CAGR from FY08-10. The bottomline growth is
expected to slow down on the back of increased interest cost for JFSL (|
13 crore loan at ~11% per annum rate of interest raised in FY10).
Return ratios to remain low led by expansion plans
JLL’s return ratios would decline considerably from 19.4% in FY10 to
12.3% in FY11E. However, it would improve gradually to 15.2% by
FY13E. The drastic fall in the ratio was led by the company’s expansion
plans (in detergent and fabric care space) for which it raised | 228 crore in
FY11 via QIP, thereby increasing the net worth. However, going ahead,
incremental earnings from the expansion (detergents, aerosols and JFSL)
would improve the returns to 15.2% by FY13E.
Valuation
At the CMP of | 276, the stock is trading at 25.1x its FY11E EPS of | 11
and 21x its FY12E EPS of | 13. With the company’s expansion into
detergents, fabric wash, aerosols and outdoor repellent products, we
have valued the stock at 22x its FY12E EPS, arriving at a fair value of |
292. Also, on comparison of JLL’s stock price with that of the FMCG
Index, JLL is trading at 21.4x its FY12E EPS while the FMCG index is
trading at 27x its one year forward earnings (estimated). With JLL being a
relatively smaller player and in its nascent stage, we believe the discount
of ~20% to the index is justified. We are initiating the coverage on the
stock with an ADD rating.
DCF Valuation
Using the DCF methodology, we have arrived at a fair value per share of |
292.8 based on WACC of 11.4% and terminal growth rate of 4%. Hence,
we are initiating coverage on the stock with an ADD rating.
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Jyothy Laboratories -Expanding on existing brand equity…
Leveraging on its strong brand equity of ‘Ujala’, Jyothy Laboratories
(JLL) has diversified from a single brand and single product into a multiproduct company. Remaining a niche player in segments (liquid whitener, fabric enhancer, mosquito repellent coils and dishwashing
bars), JLL’s brands (Ujala, Maxo and Exo) have grown at a CAGR of
25.8% from FY08-10. With the extension into detergents, aerosols and
fabric wash we believe the company would continue to grow at a CAGR
of 19.6% from FY11-13E. We are initiating coverage on the stock with
an ADD rating.
ƒ Extension of brands to drive revenue growth
Capitalising on its brand equity in Ujala (72% market share) and Maxo
(21% market share), JLL has expanded its portfolio to washing powders,
fabric enhancer, aerosols and outdoor mosquito repellent products. The
increasing demand for these products and the company’s aggressive
marketing initiatives would be key drivers for the brand’s performance.
The venture into the niche fabric wash segment through JFSL, that has
relatively less competition and attractive opportunity, would further help
JLL to witness the expected CAGR (FY11-13E) of 19.6%.
ƒ Margin concerns to prevail
Rising material costs (especially crude that has touched $92/bbl) and
increasing advertisement expenses (from 8% in FY10 to ~9.5% in FY11E)
for the promotion of its new products and launching products nationally
would continue to keep margins lower at ~15%. Moreover, with
intensifying competition (especially in detergents and coils that are highly
price sensitive) pricing would be a challenge to maintain sales (volume)
growth. Higher operating margins (~36% as in FY10) in JFSL could also
get trimmed with increasing competition due to the attractive valuation.
Valuation
At the CMP of |276, the stock is trading at 25.1x its FY11E EPS of |11 and
21x its FY12E EPS of | 13. With the company’s expansion into detergents,
fabric wash, aerosols & outdoor repellent products, we have valued the
stock at 22x its FY12E EPS, arriving at a fair value of | 292. Also, on
comparison with the FMCG Index, JLL is trading at 21.4x its FY12E EPS
while the FMCG index is trading at 27x its one year forward earnings
(estimated). With JLL being a relatively smaller player and in its nascent
stage, we believe the discount of ~20% to the index is justified. We are
initiating coverage on the stock with an ADD rating.
Company Background
Jyothy Laboratories Ltd (JLL) is the market leader in the niche fabric
whitener category with its flagship brand ‘Ujala’ (market share by value of
72% in FY10). It is also present in the household insecticide and
dishwashing segments through two other brands Maxo (market share by
value of 21.2% in FY10) and Exo (market share by value of 23% in FY10),
respectively.
JLL commenced its operations in 1983 led by MP Ramachandran. Initially,
it was a proprietary concern with a team of six sales people who sold
Ujala going house to house in Trichur and Malappuram districts in Kerala.
However, over the years, the company has successfully grown by
expanding its reach throughout the country as well as entering new
segments.
• In 2000, Jyothy entered the household care segment and
launched its mosquito repellent brand ‘Maxo’ and dishwashing
brand ‘Exo’ in West Bengal and Kerala, respectively
• In 2001, it introduced its brand Maya (incense sticks) in selected
states in the country
• In 2002, JLL acquired Sri Sai Homecare Products Pvt Ltd, a
mosquito repellent coil manufacturing facility in Hyderabad and
during the same year launched its ayurvedic soap brand Jeeva
• In 2005, the company introduced Exo Liquid and Ujala Stiff &
Shine (fabric enhancer) in South India. Further, in 2008, it
launched these products across the nation
• In 2009, JLL forayed into the laundry service segment and set up
its new venture Jyothy Fabricare Services Ltd (JFSL) with the aim
of providing “world class laundry at affordable prices at one’s
doorstep” both to retail and institutional categories. Currently,
JFSL’s operations are restricted only to Bangalore.
Over the years, JLL has grown at a CAGR of 18.6% from 2006-10 with the
sales in FY10 being | 598.1 crore. Ujala is the leading brand in the
company’s portfolio and contributes 45.6%* (| 264.2 crore in FY10) to the
topline, followed by Maxo contributing 30.8%* (| 178.8 crore in FY10),
Exo 16.4%* (| 95.3 crore in FY10), JFSL ~0.8%* (| 4.7 crore in FY10) and
around 6.3%* (| 36.6 crore in FY10) followed by others (Maya and Jeeva).
Investment Rationale
Brand extensions and geographical expansion to drive revenue growth
Expansion of Ujala’s portfolio to drive brand’s growth
JLL’s flagship brand Ujala comprises whiteners, detergents and fabric
enhancer in the product portfolio and constitutes ~44% of JLL’s total
sales (FY10). The brand has grown at a CAGR of 17% from 2007-10.
Going ahead, we expect the growth (CAGR) to be ~19% in 2010-13E. The
growth would be led by detergent (~34% CAGR FY10-13E) and fabric
enhancer (~12% CAGR FY10-13E) sales with the growth in liquid
whiteners remaining muted.
Ujala Supreme
Ujala Supreme, the fabric whitener, is the main offering of the company
contributing ~30% (| 183.2 crore) to JLL’s topline and ~70% of Ujala’s
sales. It has an overall market share of 72% by value (FY10) and the entire
market in Kerala (the company’s largest market for all its products). The
closest competitor for this product is Robin Blue having a mere 4% share
by value (FY10). Ujala Supreme has grown at a CAGR of ~4% from 2008-10. We expect it to grow at ~14% (CAGR) from 2010-13E. The higher
estimated growth is on the back of ~15% price increase taken in FY11E
though we believe volume growth (CAGR FY10-13E) would remain
at~6%.
Ujala Detergents
Leveraging on the brand equity of Ujala Supreme, JLL entered the
detergent segment (market size of | 12,000 crore in FY10) and launched
Ujala washing powder in Kerala in 2001. It has categorised the detergents
into two variants, Ujala washing powder (80% of detergent sales priced at
| 54/kg) and Technobright (20% of detergent sales priced at | 90/kg),
targeting the economy and premium categories, respectively. Having test
marketed the product in Kerala (garnered a market share of 17% by
volume in FY10), the company launched the product pan-India in August,
2010.
We expect detergents to grow at CAGR of ~34% (volume growth of 35%)
from FY10-13E backed by the company’s strategy of avoiding the
overlapping segments of market leaders (HUL and P&G). Moreover, with
the marketing initiatives taken by the company, signing Sachin Tendulkar
(high brand equity in rural areas) as the product’s brand ambassador and
increasing its advertisement expenses by ~132% in H1FY11 for Ujala
(especially detergents) alone to |11.6 crore to increase its penetration and
fight competition from the smaller players (Ghari and Nirma), we believe
the expected growth of ~34% would be achieved.
The company is also looking for inorganic expansion (targeting regional
players) in the detergent segment (not accounted for in the estimated
growth) and has raised | 228 crore via QIP for the same. It is in advanced
talks with Safechem Industries (West Bengal based player) to buy its
detergent brand Safed.
Ujala Stiff & Shine
The smallest contributor (6% by value in FY10) to Ujala’s sales, Stiff &
Shine (fabric enhancer nationally launched in Q3FY08) has grown at a
CAGR of 6.8% from 2008-10. Going forward, we expect it to witness a
CAGR of ~12% from FY10 to FY13E. With the increasing demand for
products that safeguard the quality of clothes, appropriate distribution
and marketing of the product would help JLL to achieve the targeted
growth and create a market for the product (it being a niche and new
concept with no competition).
Thus, with ~15% growth among all products under the brand, led both
by volume and value we expect Ujala to continue to be the largest
contributor to topline (~44% in FY13E), going ahead
Growth in Maxo sales to be driven by introduction of aerosols, DEPA products
Maxo, the second largest brand by sales (| 178.8 crore in FY10 and
contributing ~30% to topline) for JLL grew at a CAGR of ~26% from
FY08 to FY10 garnering an overall market share 12% by value in the
mosquito repellent category (market size of ~| 2000 crore). However, it is
the market leader in rural India with 32.4% share by value (FY10). With
the company introducing Diethyl Phenyl Acetamide (DEPA) products and
aerosols in its product portfolio from FY11, we expect overall growth for
the segment to be maintained at around 22% (CAGR) from FY10-13E,
thereby reaching | 324.6 crore by FY13E from | 178.8 crore in FY10.
In March, 2010 Defence Research & Development Organization (DRDO)
assigned JLL the exclusive rights to develop and sell its DEPA (multi
insect repellent technology) products in various formulations (through its
established brand Maxo) in Indian and International markets. The
technology aims to provide repellent solution for outdoor use as all
products in this category have been predominantly for indoor use
(Odomos). In exchange for the technology, JLL is required to pay a
royalty fee of 2% on domestic sales, 3% on sales in military canteens and
4% for exports.
With the company’s usual practice of test marketing its products in
Kerala, DEPA products were launched in Kerala on July 16, 2010 and are
expected to be introduced nationally in January, 2011. JLL being the sole
owner of the technology (with relatively no player in the outdoor
mosquito repellent products), we expect the sale from these products to
witness a CAGR of ~100% and reach | 80 crore by FY13E from | 20 crore
in FY11E (including the sales to GoI for CWG and ~| 1.5 crore per month
sales from Kerala). With the national launch of the product, we expect
sales of around | 1.5 crore per month from all-India for January-March,
2011.
Aerosols and sprays (market size as of FY10 was | 260 crore) are the new
products in Maxo’s portfolio. The margins from aerosols are higher than
from coils at ~20% and ~6%, respectively. Therefore, with the increased
marketing efforts of the company and higher opportunity backed by
relatively less competition in the category, we believe that contribution of
aerosols in Maxo’s portfolio would increase to ~25% by FY13E from 10%
in FY10 clocking a CAGR of 50% from FY10-13E. With the huge
opportunity in the aerosols market, competition would intensify in the
coming years especially from the market leader (Godrej with 33.1% share
as of FY10). However, we believe JLL’s strong brand equity and rural
presence would help it to maintain its sales growth.
In spite of tough competition in the coils market from industry leaders,
Good Knight (Godrej’s brand having 21.4% share as in FY10) and Mortein
(Reckitt Benckiser’s brand having 32% share in coils segment as on
FY10), Jyothy maintained its market share (by value) over the years (at
21.2% in FY10) with others witnessing a loss in share. The large players
are facing tough competition from the smaller/unorganised players who
are increasingly gaining pace through their low cost strategy. Thus, with
increasing competition in the coils segment and consumers (largely rural)
shifting their usage to electricals, aerosols and creams (JLL’s presence in
this category is relatively very low), we believe JLL’s move to tap the
opportunity in these faster growing categories would help it in
maintaining its market share.
Exo sales to be driven by increase in rural contribution
Exo (dish wash bars and scrubbers) constitutes the dishwashing category
of JLL and contributes 16% (| 95.3 crore) of total sales (FY10). The brand
has witnessed robust grown of ~53% (CAGR) from 2007-10. Going
ahead, we expect the growth (CAGR) to be ~20% from FY10-13E. With
relatively low penetration for utensil cleaners in rural India (~17%)
compared to urban India (~60%), we believe the growth would largely be
driven by contribution form rural consumers. Also, with Exo’s national roll
out in January, 2010, the company has been able to increase its market
share to 23% (FY10) from 17.6% (FY08) with the market leader Vim (HUL)
losing market share to 61.6% (FY10) from 69.5% (FY08). However, with
Vim sales still being almost 3x that of Exo, JLL’s marketing strategy for
the brand would play a crucial role.
Going ahead, with the increasing penetration of dishwashing products in
the country (at around 35% in FY10) and the strengthening of the
company’s distribution network (from 3.5 lakh retail outlets in 2008 to ~10
lakh outlets in 2010), we expect the sales to increase to | 163 crore by
FY13E from | 95 crore in FY10 and the overall market share to increase to
~35% contributed largely by the rural economy
Diversification in Maxo’s portfolio, rationalisation of costs in Ujala to
improve margins
JLL’s introduction of Maxo aerosols in the brand’s offerings would
expand its margins from the brand as margins from aerosols are ~20%
compared to coils that have ~6% margin (in FY10).
Maxo contributes ~9% (FY10) to JLL’s margins (| 91.8 crore in FY10) with
margins being ~6% (FY10). With the extensive marketing undertaken by
the company (increase in advertisement expenditure for Maxo in H1FY11
by 132% from | 2.01 crore to | 4.67 crore), we expect the contribution of
aerosols to increase from around 10% in FY11E to ~25% by FY13E. The
increasing contribution would, hence, improve margins from Maxo by
140 bps to ~7.5% in FY11E and by 350 bps to ~9.5% by FY13E.
JLL modified the packaging of Ujala Supreme (75 ml bottles – largest
selling SKU) by reducing the grammage of its bottles (75 ml) from 18 gm
to 8 gm, subsequently leading to cost savings of | 0.5 per bottle and
increasing margins by 3% from it. The driver for this change was the
rising HDPE (crude derivative) prices, the key packaging product used by
JLL.
Entry into niche fabric wash category through JFSL
JLL ventured into the untapped laundry segment (estimated market size is
| 2000 crore by KPMG and INSEAD Analysis in their report, 2007-12:
Outlook for Dry Cleaning and Laundry Services) in November, 2009 in
Bangalore. By the end of FY10, the company has processed 28,000 pieces
per day generating ~| 5 crore by the end of FY10. Led by increasing
household income, growing working population, aggressive expansion
plans of the company and the competitive advantage of being the sole
player in the segment, we believe the sales would grow at a CAGR of
~140% from FY10-13E clocking sales of | 68 crore by FY13E.
JFSL has been formed with JLL holding a 75% stake and 25% being held
by Ullas Kamath (managing director of JLL). The cost of the venture was
~| 35 crore. JFSL owns a laundry facility in Bengaluru with a total
capacity of washing ~40,000 pieces a day. JFSL acquired a Bangalore
based laundry services chain ‘Snoways’ with eight outlets in November,
2009 and has increased it to 30 stores. The company also launched the
‘Fabric Spa’ JFSL’s flagship brand on November 15, 2009 with two quick
service stations and 10 collection and delivery centres.
JFSL caters to both the retail (10% by volume and 20% by value for
FY11E) and institutional categories (90% by volume and 80% by value as
on FY11E). The margins from the retail category (~60%) are higher than
the institutional category (~30%).
With JFSL being assigned the official launderers for CWG, 2010 and
already (by the end of Q2FY11) processing ~38,000 pieces (~3500 in
retail and ~34,500 in institutional), we expect the company’s revenues
from JFSL for FY11E to be ~| 17 crore. Going ahead, JFSL plans to
extend its operations to Chennai, Hyderabad and Pune in Phase 1 by
FY12 and to Mumbai, Delhi and Kolkata between FY12-15. We estimate
the sales from JFSL will witness a CAGR of ~100% from FY11E-13E
taking into account the expansion plans (of phase 1 only and add to
revenues from FY12E) too. We believe that the total cost of expansion
(Phase 1 &2) for JFSL would be ~|200 crore based on the same scale of
cost that was expended for setting up the Bangalore facility; which could
be could be funded through selling off JFSL stake (of JLL) to a private
equity player or through internal cash accruals
Extension of flagship brands through acquisitions
JLL has followed the inorganic route of expansion since its inception with
all acquisitions being funded by the company’s internal accruals.
Recently, the company ventured into the fabricare services business in
2009 by acquiring ‘Snoways’ chain of laundry in Bangalore operating with
eight stores, which it increased to 30. The company plans to continue its
presence in the fabricare space and recently raised | 228 crore via QIP
(issued 80, 67,370 shares of face value | 1 shares issued at a premium of
| 281.6 per share) for the same purpose. Having raised the money, the
company has plans to acquire a regional detergent brand ‘Safed’ in
eastern India (West Bengal).
Risks and concerns
High dependence on flagship brand Ujala
We believe that the entry of detergents with better formulations would
gradually wipe off the market for liquid whiteners and the price war
concerns in the detergent segment would increase pressure on the
company to operate on lower margins and face tough challenges in
maintaining its market share.
With JLL’s 31% sales coming from Ujala Supreme (fabric whitener) and
11% sales from Ujala detergents, the slightest deviation in their sales
would adversely impact JLL’s topline. With Ujala being the highest
contributor to EBITDA (~90% in FY10), an impact on the sales from it
would also hit the margins.
JFSL’s performance to temper down
JFSL’s expansion plans is estimated to require ~| 200 crore
(management estimates only | 150 crore) considering the investment of |
35 crore in setting up a single facility in Bengaluru in November, 2009.
With operations in Bengaluru alone not having achieved breakeven even
after two years of operation, the aggressive expansion plans look
stretched.
Moreover, with the intentions of the company to increase JFSL’s
contribution to JLL’s topline to 25% by FY13E, revenue per city would
have to be ~| 80 crore (considering the expansion plans of Phase 1 will
be completed by FY13E). This seems quite stretched based on the
performance in Bengaluru till date. The higher margins of ~30% from
institutional segment and ~60% from retail (blended margin of ~36%)
would not sustain in the long run with competition from unorganised
players pouring in. With an increase in the cost of processing passing on
the costs to consumers could impact the volume growth.
Rising raw material and advertisement costs to pressurise margins
Rising crude prices to $92/bbl in January, 2011 from ~85/bbl in January,
2010 leading to increase in prices of HDPE (crude based derivative) and
plastic (~20% of JLL’s raw material costs for manufactured goods as of
FY10) would impact JLL’s margins by ~200 bps (FY12E). Thus, any
further increase in crude from would further lead to margin contraction.
We believe that with the introduction of detergents, aerosols and targeted
growth in Exo & JFSL would keep advertisement expenses higher at
~9.5% of net sales (FY11E) at | 68.3 crore against 8.1% in FY10 at | 48.5
crore. JLL’s advertisement costs were already higher by ~98% in H1FY11
at | 20.8 crore against | 10.5 crore in H1FY10.
Financials
Sales to grow at 19.6% CAGR from FY11-13E
JLL’s sales grew at a CAGR of 18% from FY07-10 to | 598.1 crore (FY10).
We expect it to grow at 19.6% from FY11E-13E to |1029.2 crore (FY13E).
Ujala - Higher sales growth would largely be accounted by the increase in
Ujala sales at ~16% CAGR from FY11E-13E to | 448 crore (FY13E) against
15% CAGR from FY08-10 to | 264 crore in FY10. We expect Ujala
detergents & S&S sales to witness ~35% and ~12% CAGR from FY11-
13E.
Maxo - CAGR growth in Maxo sales is expected to be ~22% (FY11-13E)
against ~8% CAGR from FY07-10 and reach | 325 crore (FY13E). The
growth (CAGR) in aerosols and DEPA products is expected to be robust at
~75% (| 61 crore by FY13E from | 20 crore in FY11E) and 100% (| 80
crore in FY13E from | 20 crore in FY11E).
Exo - Exo grew at ~53% CAGR from FY07-10 (| 26 crore to | 95 crore)
witnessing robust growth (~71%) in 2009 when it was launched
nationally. Hence, we expect the growth (CAGR from FY11-13E) to
moderate to 17.5% (due to the high base effect) but remain higher than
the category growth rate of ~13% (FY10).
Also, increasing sales of JFSL at ~100% CAGR (FY11-13E) would
marginally contribute to the growth.
Margins to remain under pressure
We expect margins to remain under pressure from FY11-13E at ~15%
(declining by 50 bps in FY11E to 14.8% from 15.3% in FY10). Rise in
crude prices to ~$92/bbl would increase the cost of HDPE (crude
derivative) and plastic (both constituting ~40% of raw material cost for
manufactured goods). Moreover, the extension of the brand’s portfolio
and launching products nationally would increase the advertisement cost
(FY11E saw 9.5% of sales compared to 8.1% in FY10) pressurising
margins further.
Profitability growth to moderate
We expect bottomline growth from FY11-13E to grow at a CAGR of 19.7%
to | 127 crore against 23% CAGR from FY08-10. The bottomline growth is
expected to slow down on the back of increased interest cost for JFSL (|
13 crore loan at ~11% per annum rate of interest raised in FY10).
Return ratios to remain low led by expansion plans
JLL’s return ratios would decline considerably from 19.4% in FY10 to
12.3% in FY11E. However, it would improve gradually to 15.2% by
FY13E. The drastic fall in the ratio was led by the company’s expansion
plans (in detergent and fabric care space) for which it raised | 228 crore in
FY11 via QIP, thereby increasing the net worth. However, going ahead,
incremental earnings from the expansion (detergents, aerosols and JFSL)
would improve the returns to 15.2% by FY13E.
Valuation
At the CMP of | 276, the stock is trading at 25.1x its FY11E EPS of | 11
and 21x its FY12E EPS of | 13. With the company’s expansion into
detergents, fabric wash, aerosols and outdoor repellent products, we
have valued the stock at 22x its FY12E EPS, arriving at a fair value of |
292. Also, on comparison of JLL’s stock price with that of the FMCG
Index, JLL is trading at 21.4x its FY12E EPS while the FMCG index is
trading at 27x its one year forward earnings (estimated). With JLL being a
relatively smaller player and in its nascent stage, we believe the discount
of ~20% to the index is justified. We are initiating the coverage on the
stock with an ADD rating.
DCF Valuation
Using the DCF methodology, we have arrived at a fair value per share of |
292.8 based on WACC of 11.4% and terminal growth rate of 4%. Hence,
we are initiating coverage on the stock with an ADD rating.
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