Jyothy Laboratories :: Diwali Picks 2011: GEPL Capital

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Jyothy Laboratories Ltd.
Summary
Jyothy Laboratories Ltd (JLL) has moved to the next orbit post acquisition of Henkel India which
has positioned JLL as a multi-brand company, operating in multiple categories like fabric care,
laundry, dish wash, mosquito repellants and personal care. Further acquisition has widened its
distribution reach in urban modern retail and canteen sales. The synergies between both the
companies are likely to benefit JLL, creating value for JLL. However, high interest cost,
integration and restructuring in distribution channel has impacted short term performance of
JLL. Return of growth momentum in core business and improvement in performance of Henkel
India are the key catalyst for the stock
JLL to benefit from likely multi-level synergies with Henkel India in long-term
Henkel India acquisition likely to position JLL as a multi-brand FMCG Company (10 brands now
v/s 3 pre-acquisition) while leaving a significant opportunity to exploit synergies to increase
revenues and margins. JLL, in our view, will be able to achieve these synergies through 1)
operational cost synergies and 2) broadening its distribution reach in modern retail, canteen
sales along with its current strong rural distribution. Apart from these, the other key benefits to
JLL, in our view includes : 1) reduce its dependence on the Ujala brand, 2) entry into personal
care category with Fa, Margo and Neem brands (v/s currently in homecare, laundry and
dishwashing categories) and 3) tax benefits from accumulated losses of Henkel India.
Expect steady state growth in core business
We expect JLL’s core business to grow at a normal pace and model 11% revenue CAGR through
FY14 driven by (1) Ujala – revival of growth in Ujala Supreme and contribution from detergent
portfolio; (2) Maxo - growth driven by liquid vaporizer coupled with launch of outdoor variant
and (3) Exo - extending footprint to national level.
laundry business still in expansion mode
We expect JLL’s laundry business (JLL’s 75%subsidiary) to report 140% revenue CAGR (from 94mn
in FY11 to `1,312mn in FY14) through FY14 driven by – 1) Growth in its current operation in 4
cities, 2) Planned expansion in 2 more cities by the end of FY12 and 3) Favourable change in
business mix
Valuation
The stock has witnessed more than 50% correction in last one year as against 18% correction on
the Sensex as a result of concerns owing to competition in operating segments and acquisition of
Henkel India. In the near term we remain cautious on the financial performance led by higher
interest outflow and macro factors. However, we believe, earlier than expected growth
momentum will be positive surprise for the stock. We believe acquisition of Henkel India will be
value accretive over the longer term. We are positive on the JLL’s long term growth potential.
We value JLL on PE basis at `181 with target multiple of 20x on FY13 EPS of `9.1

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Diwali Picks 2011: GEPL Capital