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Summary
Jyothy Laboratories Ltd (JLL) has moved to the next orbit post acquisition of Henkel India which
has positioned JLL as a multi-brand company, operating in multiple categories like fabric care,
laundry, dish wash, mosquito repellants and personal care. Further acquisition has widened its
distribution reach in urban modern retail and canteen sales. The synergies between both the
companies are likely to benefit JLL, creating value for JLL. However, high interest cost,
integration and restructuring in distribution channel has impacted short term performance of
JLL. Return of growth momentum in core business and improvement in performance of Henkel
India are the key catalyst for the stock.
We initiate coverage with a ‘ACCUMULATE’ rating with a target price of `181 implying a 10%
upside from current level.
Investment Rationale
JLL to benefit from likely multi-level synergies with Henkel India in long-term
Henkel India acquisition likely to position JLL as a multi-brand FMCG Company (10 brands now
v/s 3 pre-acquisition) while leaving a significant opportunity to exploit synergies to increase
revenues and margins. JLL, in our view, will be able to achieve these synergies through
1) operational cost synergies and 2) broadening its distribution reach in modern retail, canteen
sales along with its current strong rural distribution. Apart from these, the other key benefits to
JLL, in our view includes : 1) reduce its dependence on the Ujala brand, 2) entry into personal
care category with Fa, Margo and Neem brands (v/s currently in homecare, laundry and
dishwashing categories) and 3) tax benefits from accumulated losses of Henkel India. We expect
company’s consolidated revenues to touch `16bn in FY14 as against JLL’s `6bn revenues in
FY11.
However, Henkel India’s acquisition to weigh heavy on near term performance
Though the acquisition is expected to be EPS accretive over the long term, the near term
profitability will be impacted by higher interest burden and non-commensurate increase in the
revenue. Henkel India acquisition has resulted in an increased debt burden of `6bn as against
pre acquisition zero debt status of JLL. Our FY12 EPS of `5.9 include negative contribution of
`3.4 per share on account of Henkel India.
Expect steady state growth in core business; laundry business still in expansion mode
We expect JLL’s core business to grow at a normal pace and model 11% revenue CAGR through
FY14 driven by (1) Ujala – revival of growth in Ujala Supreme and contribution from detergent
portfolio; (2) Maxo - growth driven by liquid vaporizer coupled with launch of outdoor variant
and (3) Exo - extending footprint to national level. On the laundry business (JLL’s 75%
subsidiary) we expect JLL to report 140% revenue CAGR (from `94mn in FY11 to `1,312mn in
FY14) through FY14 driven by organic/inorganic means and favorable changes in business mix.
Valuation
While we remain cautious on the near term financial performance led by higher interest outflow
and macro factors, we believe acquisition of Henkel India will be value accretive over the longer
term. We are positive on the JLL’s long term growth potential. We value JLL on PE basis at `181
with target multiple of 20x on FY13 EPS of `9.1. We initiate coverage with a ‘ACCUMULATE’
rating with a target price of `181 implying a 10% upside from current level.
Key Risk to our Recommendation
Apart from competitive environment, the key risk to our valuation thesis is the delay in
integration with Henkel India.
