Higher A&P spend takes toll on margins… • Jyothy Lab :: ICICI Securities, PDF link

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Higher A&P spend takes toll on margins…
• Jyothy Lab’s Q2FY15 results were below our estimate on the
operating margins & earnings front but in line on the sales front. Net
sales grew 16% to | 354.8 crore led by 9% volume growth and 7%
realisation growth
• Operating margins dipped 410 bps mainly on account of a sharp
increase in A&P expenditure. The company has spent | 46 crore, an
increase of 49%
• With the elimination of interest cost after debt repayment, earnings
have increased by 58% to | 33 crore (I-direct estimate : | 49.7 crore)
• Fabric wash (Ujala, Henko), dishwashing (Pril, Exo) and personal;
care (Margo) witnessed strong 15%, 17% and 40% sales growth,
respectively saw 17% growth, Personal care reported 40% growth
whereas mosquito repellents reported muted 5% growth
Power brands to be key revenue growth driver
Leveraging on its strong brand equity of Ujala (fabric whitener &
detergents) Jyothy Laboratories (JLL) diversified from a single brand into
a multiproduct company. Having built strong brands of its own until FY11,
Maxo (mosquito repellent) and Exo (dishwash), the company extended its
footprint in the FMCG market through acquisition of Henkel India in FY12.
The acquisition added to the company’s kitty with brands as, Henko, Mr.
White, Chek, Pril, Margo, Neem and Fa. The acquisition also provided the
company with a larger geographical presence (north & east India) against
the company’s dominant presence largely in south India. Post Henkel’s
acquisition, JLL has carved out six ‘Power’ brands (Ujala, Henko, Maxo,
Pril, Exo and Margo) for itself which would be the key focus points to
drive innovation and revenues. Led by the company’s clear strategy for its
brands, strong innovation pipeline, re-launch of existing brands and an
able management team at helm, JLL’s standalone revenues may continue
to grow at a moderate pace of 11.9% CAGR (FY14-17E).
Higher marketing spends to restrict margins expansion until FY16E
Led by the company’s focus on ‘Power’ brands and increased marketing
initiatives in order to re-launch and innovate its brands, JLL has increased
its marketing expenses from ~8% (FY08-13) to ~11% (FY14) & 13.0% in
Q2FY15. The higher marketing spends along with slight impact of higher
raw material costs, thereby restricted margins at ~12% (FY14) against
~14% (FY08-13), in spite of changing sales mix and strong volume
growth. Going ahead, we expect JLL’s marketing spends to remain higher
at 11-12% thereby limiting its margin expansion to 13.6% (FY17E).
Savings in tax and interest cost to drive earnings growth
JLL’s adjusted standalone PAT growth is expected to remain robust in
FY14-17E at 32.3% CAGR led by savings in interest cost and tax
exemptions (acquisition of loss making Henkel India). The reduction in
interest cost (| 51 crore in FY14) is following re-financing of company’s
long term debt (~| 400 crore) through non-convertible debentures raised
by it in FY14 (November, 2013) and repayable after three years.
Earnings growth boosted largely by savings in costs; maintain HOLD
Despite earnings growth remaining strong at 32.3% CAGR in FY14-17E,
operating margins expansion is limited. Further, with its presence in
highly competitive segments where leaders are leading a tough fight, we
remain cautious on JLL’s ability to transform the stagnating segments.
Hence, we maintain our HOLD rating with a target price of | 245 /share.


LINK
http://content.icicidirect.com/mailimages/IDirect_JyothyLabs_Q2FY15.pdf