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Jyothy Laboratories (JYL)
Consumer products
Early signs of turnaround visible. 2QFY12—while JYL’s standalone results were
disappointing, benefits of cost reduction measures were visible in HIL profitability. We
keenly watch for consumer acceptance of the recent price hike of 7% in JYL products.
We remain believers in the JYL story in the long term; however, we continue to expect
significant challenges in JYL’s existing portfolio and integration with HIL. However, most
of the negatives are in the price, in our view. ADD. TP Rs200 (Rs220 earlier).
Margins collapse—HIL integration costs hit JYL as well
JYL reported net sales of Rs1,546 mn (+7%, KIE Rs1,488 mn), EBITDA of Rs74 mn (-53%, KIE
Rs147 mn) and PAT of Rs125 mn (-19%, KIE Rs172 mn).
Sales growth of 7% was driven by - Ujala fabric whitener at 5% (volume growth of 3%),
Maxo at 5% and Exo at 74%. The management commented that this quarter was partially
affected by the process of realignment of distributors between JYL and Henkel India (HIL). The
company has started reporting normal sales from August 10. Pipeline inventory has reduced to
Rs200 mn from Rs700 mn and debtors has reduced to Rs420 mn as of September 30, 2011
from Rs1,030 mn as of March 31, 2011.
EBITDA margin at 4.8% was disappointing – material cost increased by 601 bps and staff cost
by 109 bps. This is the lowest EBITDA margin reported historically. The company had to account
for sales returns’ cost of ~Rs50 mn during the quarter (integration with HIL). It has taken a 7%
price hike in September 2011 across brands and across SKUs to mitigate the input cost
inflation. Further, the company continues to expect ~4% savings in distribution cost emanating
from the realignment of the distribution network (potentially higher realization). Other income
at Rs151 mn includes interest income from HIL. JYL has taken debt on its books and the interest
cost is recovered from HIL.
We recommend ADD – negatives priced in
We recommend ADD rating with a revised TP of Rs200 (previously Rs220). Our TP implies P/E of
17X FY2013E for JYL standalone (1.8X EV/Sales for JYL + HIL proforma; sector multiple of b3.4X).
We have reduced our earnings estimates as we model lower sales and margins due to the
distribution integration with HIL. Our EPS estimates are Rs8.5 (Rs9.4 earlier) and Rs11.2 (Rs11.8
earlier) for FY2012E and FY2013E. While we remain believers in the JYL story in the long term, we
continue to expect significant challenges in JYL’s existing portfolio and integration issues with HIL;
though most of the negatives are currently in the price, in our view. Key risks to our rating are (1)
continued inflation in raw material prices, (2) longer-than-expected time taken to integrate HIL
with JYL, (3) lower-than-expected benefits from the realignment of the distribution process.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Jyothy Laboratories (JYL)
Consumer products
Early signs of turnaround visible. 2QFY12—while JYL’s standalone results were
disappointing, benefits of cost reduction measures were visible in HIL profitability. We
keenly watch for consumer acceptance of the recent price hike of 7% in JYL products.
We remain believers in the JYL story in the long term; however, we continue to expect
significant challenges in JYL’s existing portfolio and integration with HIL. However, most
of the negatives are in the price, in our view. ADD. TP Rs200 (Rs220 earlier).
Margins collapse—HIL integration costs hit JYL as well
JYL reported net sales of Rs1,546 mn (+7%, KIE Rs1,488 mn), EBITDA of Rs74 mn (-53%, KIE
Rs147 mn) and PAT of Rs125 mn (-19%, KIE Rs172 mn).
Sales growth of 7% was driven by - Ujala fabric whitener at 5% (volume growth of 3%),
Maxo at 5% and Exo at 74%. The management commented that this quarter was partially
affected by the process of realignment of distributors between JYL and Henkel India (HIL). The
company has started reporting normal sales from August 10. Pipeline inventory has reduced to
Rs200 mn from Rs700 mn and debtors has reduced to Rs420 mn as of September 30, 2011
from Rs1,030 mn as of March 31, 2011.
EBITDA margin at 4.8% was disappointing – material cost increased by 601 bps and staff cost
by 109 bps. This is the lowest EBITDA margin reported historically. The company had to account
for sales returns’ cost of ~Rs50 mn during the quarter (integration with HIL). It has taken a 7%
price hike in September 2011 across brands and across SKUs to mitigate the input cost
inflation. Further, the company continues to expect ~4% savings in distribution cost emanating
from the realignment of the distribution network (potentially higher realization). Other income
at Rs151 mn includes interest income from HIL. JYL has taken debt on its books and the interest
cost is recovered from HIL.
We recommend ADD – negatives priced in
We recommend ADD rating with a revised TP of Rs200 (previously Rs220). Our TP implies P/E of
17X FY2013E for JYL standalone (1.8X EV/Sales for JYL + HIL proforma; sector multiple of b3.4X).
We have reduced our earnings estimates as we model lower sales and margins due to the
distribution integration with HIL. Our EPS estimates are Rs8.5 (Rs9.4 earlier) and Rs11.2 (Rs11.8
earlier) for FY2012E and FY2013E. While we remain believers in the JYL story in the long term, we
continue to expect significant challenges in JYL’s existing portfolio and integration issues with HIL;
though most of the negatives are currently in the price, in our view. Key risks to our rating are (1)
continued inflation in raw material prices, (2) longer-than-expected time taken to integrate HIL
with JYL, (3) lower-than-expected benefits from the realignment of the distribution process.
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