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Jyothy Laboratories (JYL)
Consumer products
Disappointing 4QFY11. Results disappoint on all counts: Ujala and Exo sales declined
by 7% and Maxo sales declined by 36%. A 16% price hike in Ujala, intensified
competition in Exo and the withdrawal of trade promotions in Maxo hurt performance.
The slowdown in the core business is a worry (Ujala accounts for >80% profits). In
FY2012E, we look for (1) improving profitability of Ujala and return of volume growth
in all the three brands as operations will likely stabilize at higher price points
(2) integration of JYL with Henkel India and benefits of low hanging fruits (brands such
as Fa, with strong prospects from JYL’s distribution reach) and (3) scale up of the
Bangladesh venture and JFSL. We maintain our target price at Rs240 on FY2013E.
4QFY11 results disappoint
JYL reported net sales of Rs1.5 bn (-18%, KIE Rs2.0 bn), EBITDA of Rs152 mn (-50%, KIE Rs248
mn) and PAT of Rs222 mn (-18%, KIE Rs219 mn).
Soaps and detergents segment sales declined by 7% (1) Ujala sales declined by 7% yoy - likely
volume decline in Ujala driven by 16% price hike taken in 1QFY11, (2) Exo sales declined 7%
yoy –Exo was launched nationally last year with no adspend outlay. This low key launch in an
intensely competitive market was at odds with HUL’s strong focus on volume growth and
market share, all of which would have impacted offtake (3) Ujala detergent sales growth at 4%
yoy was largely driven by Techno Bright
Home care sales declined by 11% with Maxo sales declining by 36%. Likely trade destocking
and trade switching to competition products is possibly the reason as the company withdrew
trade promotions on Maxo to the extent of 7% in 2QFY11 (which has reduced the
attractiveness of the product for the trade). However, on a qoq basis, sales growth in Maxo was
40%, partially due to seasonality and partially due to a likely acceptance of the higher price of
Maxo. We believe Maxo would have likely lost market share from ~22% levels last year
EBITDA margin declined to 9.8% - while gross margin was well managed at 47.6% (+719 bps),
higher staff cost (+382 bps) and higher other expenditure (+852 bps) led to 627 bps decline in
EBITDA margin. Segment-wise, soaps and detergents EBIT margin grew 258 bps to 30%
whereas home care segment margin was -10% with a loss of Rs60 mn for the quarter. We
await clarity from the management on the reasons thereof
Higher other income (+29% due to deployment of QIP proceeds of Rs2.3 bn) and lower
effective tax rate at 5.8% led to marginal improvement in PAT margin to 14.3%
Corporate milestones
The company acquired a 14.9% stake in Henkel India (HIL) from Tamil Nadu
Petro Products Ltd (at Rs35/share) and 50.97% stake from Henkel AG (at
Rs20/share). It has made an open offer to the public shareholders for an
additional 20% stake at Rs41.2/share
Jyothy Fabricare Services Ltd (JFSL) received private equity funding of Rs1 bn
for likely 25% stake, which implies an enterprise valuation of Rs4 bn. In
FY2011, JFSL had sales of Rs197 mn, EBITDA of Rs15 mn and loss of Rs15
mn
JFSL acquired a 100% stake in Delhi based Diamond Fabcare and Mumbaibased
Akash Cleaners. JFSL has 36 stores in Bangalore and with these
acquisitions it has more than100 outlets across three cities
Henkel 1QCY11 results (not part of JYL results)
Henkel India reported net sales of Rs1. 19 bn (-6%), EBITDA loss of Rs 81 mn
(18% increase in EBITDA loss), and PAT loss of Rs183 mn (34% increase in loss)
Segment wise, detergents and cleansers reported sales of Rs819 mn (-7%) and
cosmetics reported sales of Rs373 mn (-6%)
Significant pressure on gross margin – decline of 398 bps and a step up in staff
cost by 114 bps brought EBITDA margin down to (6.8%) in 1QCY11 versus
(5.4%) 1QCY10. Segment wise EBIT margin on detergents and cleansers
improved 309bps but declined 1122 bps on cosmetics
Interest cost was up by 75% to Rs93 mn which further pulled down PAT margin
by 15.4%, from a decline of 10.8% in 1QCY11
Post merger with JYL, we expect an immediate improvement in results as (1) the
company will be required to pay royalty on only two products – Pril and Fa
(together constitute 20% of sales – royalty will be 2% of sales) as against paying
royalty on the entire portfolio today, and (2) the company books some corporate
level expenses of its Asia operations in Henkel India which will be discontinued.
Outlook for FY2012E
Core business. We would look for improving profitability in Ujala and return of volume
growth in the key brands – Ujala, Maxo and Exo. All three brands saw low / negative volume
growth in FY2011 for the reasons explained above. In FY2012E, operations will likely
stabilize as the higher price points find consumer acceptance
Consolidating Henkel. JYL will have a 85.9% stake in HIL, assuming the open offer is
completed successfully. The biggest synergy from this acquisition is the strength of HIL’s
brands under JYL’s distribution. In this context, some low hanging fruits include brands such
as Fa which have significant brand recall but whose sales languish at ~Rs250 mn, much
lower than the potential, primarily due to limited distribution reach.
We highlight that given that this is JYL’s first major acquisition, the company would likely
have to spend significant time in integrating the two businesses both culturally and
operationally. Challenges include (1) differences in work culture, (2) high competitive activity
and limited opportunity to make economic profits in detergents (~52% of HIL’s sales is from
detergents), (3) HIL’s marketing expenses to sales ratio of ~25% is unusually high and (4) HIL
has lost substantial market shares in CY2008-2010 (detergents to 1.5% from 2.5% and
deodorants – ‘Fa’ brand to 2.4% from 4.5%).
Bangladesh venture. JYL has forayed in the Bangladesh market through a 75:25 JV with
Kallol Enterprise to manufacture and market Ujala. The company has invested Rs130 mn in
the JV and expects turnover of Rs1 bn by FY2012E. In our view, JYL has a high probability of
success given the similarity in consumption patterns between India and Bangladesh for
home care products and also the demonstrated success of Marico’s Parachute.
Laundry venture. Further to the two acquisitions and PE funding, this venture will likely be
scaled up in FY2012E. JFSL has 36 stores in Bangalore and with these acquisitions it now has
more than100 outlets across three cities
Retain ADD
Our FY2012E and FY2013E EPS estimates are Rs11.7 and Rs13.3. We roll over estimates to
FY2013E and maintain our target price at Rs240 (18XFY2013E EPS). Slowdown in the core
business is a worry (Ujala accounts for >80% of profits). We retain our ADD rating as we
watch for (1) improving profitability in Ujala and return of volume growth in all the three
core brands (2) benefits of low hanging fruits accruing from the JYL and HIL integration
(brands like Fa benefitting from JYL’s reach)
Key risks are (1) input cost inflation can potentially hurt Ujala’s margins, (2) higher-thanexpected
competition from Vim for the Exo national launch, (3) any technology
change/disruptive competition in the mosquito repellant business, (4) higher-than-expected
impact of price war in detergents impacting Jyothy’s detergent business, and (5) nonacceptability
of Jyothy’s laundry spa concept.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jyothy Laboratories (JYL)
Consumer products
Disappointing 4QFY11. Results disappoint on all counts: Ujala and Exo sales declined
by 7% and Maxo sales declined by 36%. A 16% price hike in Ujala, intensified
competition in Exo and the withdrawal of trade promotions in Maxo hurt performance.
The slowdown in the core business is a worry (Ujala accounts for >80% profits). In
FY2012E, we look for (1) improving profitability of Ujala and return of volume growth
in all the three brands as operations will likely stabilize at higher price points
(2) integration of JYL with Henkel India and benefits of low hanging fruits (brands such
as Fa, with strong prospects from JYL’s distribution reach) and (3) scale up of the
Bangladesh venture and JFSL. We maintain our target price at Rs240 on FY2013E.
4QFY11 results disappoint
JYL reported net sales of Rs1.5 bn (-18%, KIE Rs2.0 bn), EBITDA of Rs152 mn (-50%, KIE Rs248
mn) and PAT of Rs222 mn (-18%, KIE Rs219 mn).
Soaps and detergents segment sales declined by 7% (1) Ujala sales declined by 7% yoy - likely
volume decline in Ujala driven by 16% price hike taken in 1QFY11, (2) Exo sales declined 7%
yoy –Exo was launched nationally last year with no adspend outlay. This low key launch in an
intensely competitive market was at odds with HUL’s strong focus on volume growth and
market share, all of which would have impacted offtake (3) Ujala detergent sales growth at 4%
yoy was largely driven by Techno Bright
Home care sales declined by 11% with Maxo sales declining by 36%. Likely trade destocking
and trade switching to competition products is possibly the reason as the company withdrew
trade promotions on Maxo to the extent of 7% in 2QFY11 (which has reduced the
attractiveness of the product for the trade). However, on a qoq basis, sales growth in Maxo was
40%, partially due to seasonality and partially due to a likely acceptance of the higher price of
Maxo. We believe Maxo would have likely lost market share from ~22% levels last year
EBITDA margin declined to 9.8% - while gross margin was well managed at 47.6% (+719 bps),
higher staff cost (+382 bps) and higher other expenditure (+852 bps) led to 627 bps decline in
EBITDA margin. Segment-wise, soaps and detergents EBIT margin grew 258 bps to 30%
whereas home care segment margin was -10% with a loss of Rs60 mn for the quarter. We
await clarity from the management on the reasons thereof
Higher other income (+29% due to deployment of QIP proceeds of Rs2.3 bn) and lower
effective tax rate at 5.8% led to marginal improvement in PAT margin to 14.3%
Corporate milestones
The company acquired a 14.9% stake in Henkel India (HIL) from Tamil Nadu
Petro Products Ltd (at Rs35/share) and 50.97% stake from Henkel AG (at
Rs20/share). It has made an open offer to the public shareholders for an
additional 20% stake at Rs41.2/share
Jyothy Fabricare Services Ltd (JFSL) received private equity funding of Rs1 bn
for likely 25% stake, which implies an enterprise valuation of Rs4 bn. In
FY2011, JFSL had sales of Rs197 mn, EBITDA of Rs15 mn and loss of Rs15
mn
JFSL acquired a 100% stake in Delhi based Diamond Fabcare and Mumbaibased
Akash Cleaners. JFSL has 36 stores in Bangalore and with these
acquisitions it has more than100 outlets across three cities
Henkel 1QCY11 results (not part of JYL results)
Henkel India reported net sales of Rs1. 19 bn (-6%), EBITDA loss of Rs 81 mn
(18% increase in EBITDA loss), and PAT loss of Rs183 mn (34% increase in loss)
Segment wise, detergents and cleansers reported sales of Rs819 mn (-7%) and
cosmetics reported sales of Rs373 mn (-6%)
Significant pressure on gross margin – decline of 398 bps and a step up in staff
cost by 114 bps brought EBITDA margin down to (6.8%) in 1QCY11 versus
(5.4%) 1QCY10. Segment wise EBIT margin on detergents and cleansers
improved 309bps but declined 1122 bps on cosmetics
Interest cost was up by 75% to Rs93 mn which further pulled down PAT margin
by 15.4%, from a decline of 10.8% in 1QCY11
Post merger with JYL, we expect an immediate improvement in results as (1) the
company will be required to pay royalty on only two products – Pril and Fa
(together constitute 20% of sales – royalty will be 2% of sales) as against paying
royalty on the entire portfolio today, and (2) the company books some corporate
level expenses of its Asia operations in Henkel India which will be discontinued.
Outlook for FY2012E
Core business. We would look for improving profitability in Ujala and return of volume
growth in the key brands – Ujala, Maxo and Exo. All three brands saw low / negative volume
growth in FY2011 for the reasons explained above. In FY2012E, operations will likely
stabilize as the higher price points find consumer acceptance
Consolidating Henkel. JYL will have a 85.9% stake in HIL, assuming the open offer is
completed successfully. The biggest synergy from this acquisition is the strength of HIL’s
brands under JYL’s distribution. In this context, some low hanging fruits include brands such
as Fa which have significant brand recall but whose sales languish at ~Rs250 mn, much
lower than the potential, primarily due to limited distribution reach.
We highlight that given that this is JYL’s first major acquisition, the company would likely
have to spend significant time in integrating the two businesses both culturally and
operationally. Challenges include (1) differences in work culture, (2) high competitive activity
and limited opportunity to make economic profits in detergents (~52% of HIL’s sales is from
detergents), (3) HIL’s marketing expenses to sales ratio of ~25% is unusually high and (4) HIL
has lost substantial market shares in CY2008-2010 (detergents to 1.5% from 2.5% and
deodorants – ‘Fa’ brand to 2.4% from 4.5%).
Bangladesh venture. JYL has forayed in the Bangladesh market through a 75:25 JV with
Kallol Enterprise to manufacture and market Ujala. The company has invested Rs130 mn in
the JV and expects turnover of Rs1 bn by FY2012E. In our view, JYL has a high probability of
success given the similarity in consumption patterns between India and Bangladesh for
home care products and also the demonstrated success of Marico’s Parachute.
Laundry venture. Further to the two acquisitions and PE funding, this venture will likely be
scaled up in FY2012E. JFSL has 36 stores in Bangalore and with these acquisitions it now has
more than100 outlets across three cities
Retain ADD
Our FY2012E and FY2013E EPS estimates are Rs11.7 and Rs13.3. We roll over estimates to
FY2013E and maintain our target price at Rs240 (18XFY2013E EPS). Slowdown in the core
business is a worry (Ujala accounts for >80% of profits). We retain our ADD rating as we
watch for (1) improving profitability in Ujala and return of volume growth in all the three
core brands (2) benefits of low hanging fruits accruing from the JYL and HIL integration
(brands like Fa benefitting from JYL’s reach)
Key risks are (1) input cost inflation can potentially hurt Ujala’s margins, (2) higher-thanexpected
competition from Vim for the Exo national launch, (3) any technology
change/disruptive competition in the mosquito repellant business, (4) higher-than-expected
impact of price war in detergents impacting Jyothy’s detergent business, and (5) nonacceptability
of Jyothy’s laundry spa concept.
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