Higher A&P spends stimulate growth… • Jyothy Lab :: ICICI Securities, report

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Higher A&P spends stimulate growth… • Jyothy Lab’s Q3FY15 results were below our estimate on all fronts. Revenues grew 14.5% (I-direct estimate: 19.5%) led by 10% volume and 4% realisation growth • The company’s six power brands grew 16% led by 48% growth in Maxo, 19% growth in Exo, 19% growth in Pril and 29% growth in Henko. However, volume growth in Ujala & Margo was dismal at 1% & -3%. Non-south sales now contribute 58% vs. 56% in 9MFY14 • Operating margins declined 393 bps mainly on account of higher A&P spend & increase in employee spend due to | 11.8 crore employee stock option expenses. Raw material cost to sales declined 70 bps due to lower commodity cost. Net profit grew by a dismal 8.5% mainly on account of lower EBITDA Power brands to be key revenue growth driver Leveraging on its strong brand equity of Ujala (fabric whitener and 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 like 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 12.3% 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 restricting 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 11.5% (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 30.9% 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. Savings in costs largely boost earnings growth; maintain HOLD Despite earnings growth remaining strong at 30.9% 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 | 272/share.

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 http://content.icicidirect.com/mailimages/IDirect_JyothyLabs_Q3FY15.pdf