Jyothy Laboratories: Better Earning Visibility; Boosts Confidence: Karvy

Better Earning Visibility; Boosts Confidence
Jyothy Laboratories (Jyothy) has come out well from the phase marked
with tremendous pressure in terms of acquisition of Henkel India
(Henkel), slower growth of core business due to distribution restructuring
and liability of interest payment. Jyothy’s H2FY12 performance was way
ahead of H1FY12 performance with improved visibility in business, which
it lost previously. Hence, the stock has run up by 45% in past 3 months.
With a view to getting Jyothy’s outlook, we recently met the Management
of the Company. We observed that still there is enough scope for the stock,
as better performance in ensuing quarters would drive the stock further

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Core business is in line, Exo is like “X” effect
In Jyothy’s core business, Exo is placed as a key business driver. Exo clocked
strong growth of 43% in FY12 owing to launch in four new states. Its
Management plans pan‐India launch of Exo by FY13‐end, which we believe
to help Exo to maintain its high growth momentum, going forward. Besides,
the Company is confident of sustaining the market share of Ujala Supreme,
as its Management feels that HUL’s recently‐launched Rin Fabric Whitener
won’t affect their business much. Its Management expects that Rin Fabric
Whitener would find new consumers, who don’t use Ujala Supreme.
Henkel – “Sleep is over”
After several years of poor performance, Henkel has started showing good
numbers post acquisition by Jyothy. Prior to acquisition, Henkel was
incurring loss even at EBITDA level, which has turned into healthy EBITDA
margin in the aftermath of acquisition. Now, we expect that its sales growth
to improve, as the Management plans to expand Henkel’s product reach to 5‐
6 lakh outlets by FY13‐end from 2 lakh outlets now.
Outlook & Valuation
We believe that the visibility in business scenario would improve with better
performance in ensuing quarters. The stock has already run up by 42% in
past 3 months owing to improved clarity in business. However, we believe
there is still enough scope for appreciation in stock price, as the likely
earnings growth would also play a key role in stock’s performance, going
forward. We give 17x multiple on FY14E earnings, which is 30% discount to
the FMCG sector. With our target multiple, we derive target price of Rs. 290
per share, and hence we maintain our “BUY” recommendation on the stock.