Jyothy Laboratories: HOLD ::Business Line

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Fortunes will depend on how well the company is able to integrate acquired brands and boost sales.

Investors can retain holdings in fast moving consumer goods company Jyothy Laboratories. For long, Jyothy Labs played on a value proposition with strong brands in niche market segments such as fabric whiteners.

In the 2011 fiscal, it bought, in various tranches, an 83.65 per cent stake in Henkel India, subsidiary of the German FMCG giant.

This acquisition catapulted the mid-sized, mainly regional player, into the big league.

It broadened Jyothy Labs’ product basket to include a clutch of good — if poorly marketed – national brands in Pril, Fa, Margo and Henko. Henkel India’s urban presence neatly balanced Jyothy’s marked rural stronghold.

At Rs 180, Jyothy Labs trades at 33 times trailing 12-month earnings, at the higher end of its five-year PE band.

While current valuations are at a discount to the FMCG basket (36-42 times), Jyothy Lab’s fortunes ride on how well it brings the erstwhile Henkel India (now Jyothy Consumer Products) into its fold. It is likely to face challenges on this front.

ACQUISITION BENEFITS

Jyothy Labs stands to gain much from acquiring Henkel’s India business.

The latter’s strong presence in the eastern region, where Jyothy has a small presence, will broaden Jyothy’s consumer base. Jyothy Consumer’s good southern market will strengthen Jyothy Lab’s own south presence.

The acquisition also bolsters Jyothy Labs’ urban market and distribution system in modern retail, besides helping it broaden its hitherto narrow product portfolio.

Jyothy Consumer’s accumulated losses of Rs 370 crore as on FY-12 will provide tax shields once the entity is fully merged with Jyothy Labs from 2013-14 onwards. Revenues will receive a boost from the merger on a minimal equity expansion.

Initial steps in integration brought in fresh management for Jyothy Consumer and rationalised supply chains of both entities to lower costs.

It integrated manufacturing shrunk — and merged — distributor network, reduced distributor margins, and tightened working-capital cycle.

The supply chain and managerial revamp is now complete, and the effects will begin to pay off slowly. Operating margins for the nine months to December 2012 were up by 3 percentage points to 14 per cent compared to the same period last year.

Working-capital cycle is down to 45 days from over 100 in the previous years.

CHALLENGES IN RAMP-UP

The thrust will now be on the brands — those belonging to Jyothy Labs and those acquired — to grow sales.

Fa (soaps and deodorants), Margo (soaps), and Henko (detergent) are in highly competitive categories, while those such as Maxo (household insecticides) are beginning to face the heat.

Jyothy Labs has to battle far bigger brands and players such as HUL, P&G and Godrej Consumer in these categories. Jyothy Labs also lacks the pricing power these players do, except in Ujjala, where it dominates the market with a 74 per cent share.

Jyothy Labs itself is reliant on the soaps and detergents category, which accounts for 70-77 per cent of revenues. This category, being mature and competitive, offers limited scope for growth.

Margins in the personal care division are low. Growth in Jyothy Labs’ fabric care segment has also been decelerating over the past three years.

Bright spots take the form of surface cleaners in Exo and Pril. Over the past two years, growth in this category has been impressive at over 20 per cent. Pril’s major competition comes only from HUL’s Vim at the national level.

With household insecticides, Jyothy Labs’ rolling out of mosquito liquid repellents which can fit any machine holds promise.

RURAL DOMINANCE

Jyothy Labs itself scores on its strong rural market. The rural-urban mix for the company is at 75:25, a huge plus when other players are moving to the rural market to push sales. Jyothy Labs has a first-mover advantage in terms of both brands and distribution here.

Good regional brands are in those such as Chek, Jeeva and Ujjala Stiff and Shine. Exo has a strong market in southern markets.

MARGIN IMPROVEMENT

Jyothy Labs clocked an annual 33 per cent growth in (standalone) net sales over the past three years to Rs 913 crore in FY-12.

Operating margins held up at 12-15 per cent. Net profits though, grew 3 per cent in this period to Rs 42 crore. This is due to a sharp spike in interest cost on debt taken to buy stake in Henkel.

For the nine months to December 2012, sales grew 33 per cent, while net profits grew 6 per cent. That said, debt-equity ratio at 0.91 times and interest cover at 2.8 times are comfortable.

Jyothy Consumer, on the other hand, saw shrinking sales for several quarters until the December 2012 quarter, when it posted a 22 per cent growth in sales, as Jyothy’s strategies began to pay off. Operating margins for Jyothy Consumer are negligible at 1 per cent.

Cost-saving activities taken on will help improve margins of the consolidated Jyothy Labs (including the merged Jyothy Consumer) in the coming quarters.

Savings will be ploughed back into improving product quality, packaging, marketing and advertising Ujjala, Maxo, Exo, Henko, Fa, Pril, and Margo. Other brands will take a backseat.

With tax shields on accumulated losses of Jyothy Consumer, the net profit picture could also improve.