Jyothy Lab- Maxo trade discounts impacts revenue growth:: Religare

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Jyothy Laboratories Ltd
Maxo trade discounts impacts revenue growth
Jyothy Laboratories (JYL’s) results were below estimates with Sales/EBITDA/Adj
PAT growth of 11.3%/(4.2%)/9.4% against our estimates of
27.3%/22%/26.2%. The impact was mainly led by the discontinuation of trade
discounts on Maxo brand which impacted Home care segment sales. The
profitability for the company was hit with operating margins declining by 175
bps mainly on account of higher A&P expenses involved in the brand building
of Ujala Techno Bright detergent. The Adj. PAT grew by 9.4% to Rs 154 mn,
aided by the interest income on the QIP proceeds of Rs 2.3 bn raised by the
company in August 2010. JYL is currently trading at 23.1x and 20.1x its FY11
and FY12 earnings. We maintain our Hold rating on the stock with a revised
Sep ’11price target of Rs 305 (previous target of Rs 285) on account of rolling
forward of our valuation from Mar ’12 earnings to Sep ’12 earnings.

Revenue growth impacted by Maxo: JYL’s net sales for Q2FY11 increased by
11.3% YoY at Rs 1.45 bn, which were below our estimate. Soaps and Detergent
segment reported a revenue growth of 22% at Rs 905 mn, whereas revenues from
the Home care business reported a de-growth of 3% to Rs 547 mn. The de-growth
in Home care revenues were mainly on account of the removal of trade discounts
on the Maxo brand. Management states that Maxo sales were fully impacted in the
month of July when the trade discount was removed but since then have seen
improvement. The management would track the market shares of the brand across
states before getting back to the trade discounts on the brand. Ujala brand
reported a volume growth of 4%, post the 16% price increase taken by the
company. The full impact of the price increase is likely to come from Q3FY11.

Margins impacted as A&P costs increase significantly: EBITDA showed a degrowth
of 4.2% YoY to Rs 156 mn with operating margins of 10.8% which
declined by 175 bps. The decline in margins was led solely by A&P expenses
which increased by 700 bps YoY to 11.9%, which was a drag on margins and
negated the costs savings on account of gross margin improvement of 380 bps
YoY. Majority of the increase in A&P expenses was on account of the expenses
for Ujala Techno Bright detergent which was endorsed by Sachin Tendulkar. EBIT
margins for Soaps and Detergents declined by 420 bps YoY to 19%, whereas
Home care segment margins improved by 400 bps YoY to 8% mainly led by the
improvement in profitability of Maxo brand on account of savings from trade
discounts. Adj. PAT reported a growth of 9.4% YoY to Rs 154 mn.

Maintain Hold with a price target of Rs 305: Management has guided for
revenues of ~Rs 7.5 bn and PAT of ~Rs 1 bn for FY11. We maintain our FY11
and FY12 earnings estimate as well as our Hold rating with a revised price target
of Rs 305 on the stock based on Sep ’12 earnings.