20130919-Maybank_KERPL-Jyothy_Laboratories_UnfoldingGrowth_Story__Initiate_at_BUY_17页_323kb

Summary of Jyothy Laboratories (JYL) Analysis

Core Content

Jyothy Laboratories (JYL) is a mid-sized FMCG company established in 1983, with a diverse product portfolio spanning fabric care, soaps and detergents, mosquito repellants, surface cleaning, personal care, and incense sticks. The company has evolved from a single-product firm to a multi-brand entity, and is currently undergoing significant transformation to improve profitability and market position.

The current share price is Rs156, with a target price of Rs210, representing a 35% upside. The recommendation is to Initiate with BUY, based on the company's strong growth potential and improving financial metrics.

Main Points

Company Overview

• Founded in 1983 by M P Ramachandran.
• Operates in multiple FMCG segments: fabric care, soaps and detergents, home care, personal care, and incense sticks.
• Has a laundry chain with 103 retail outlets and Rs442m revenue in FY13.
• Major shareholders include promoters (63.7%), ICICI Prudential Life Insurance (3.9%), and Fidelity Management & Research (2.5%).

Key Financial Indicators

• ROE (annualised): 16.1% (up from 3.1% in FY13).
• Net Debt (Rsm): Rs5,107 (expected to decline to 0.5x D/E by FY15).
• NTA/shr (Rs): 43.2.
• Interest cover: 2.8x.
• Recurring Net Profit (FY15F): Rs1,709m.
• Recurring EPS (FY15F): Rs10.6.
• EPS growth (FY14F-15F): 136% (FY14F) and 53% (FY15F).
• PER (FY15F): 14.0x (45% below sector average).
• EV/EBITDA (FY15F): 11.8x.

Market Position and Growth

• FMCG sector growth: Expected to grow at 12% pa over the next five years due to low penetration and a growing middle class.
• Power brands: Ujala, Pril, Exo, Henko, Maxo, Fa, and Margo are identified as high-growth, high-margin brands.
• Market share: Ujala leads in fabric whitener with 59.1%, Maxo in coils with 17.9%, and Pril in dish wash liquid with 20.2%.
• Geographic distribution: 50% of revenue comes from South India (Kerala, Tamil Nadu, Karnataka), followed by North India (Delhi, Punjab, Haryana, UP) at 20%.

Recent Restructuring and Improvements

• Integrated with Henkel India to improve distribution and reduce channel margins.
• Closed three loss-making plants, increased production utilization to 70%.
• Rationalized field sales force and improved sourcing and packaging efficiencies.
• Reduced trade margin by 2-4% and distribution margin by 2%.
• 1Q performance: EBITDA margin rose to 15.4%, and net profit margin improved to 9.3%.

Sales and Revenue Forecasts

• Revenue is expected to grow by 24% CAGR over FY14F-15F.
• Soaps and detergents segment is projected to grow fastest at 25%.
• FY14F revenue: Rs13,682m (up 24% from FY13).
• FY15F revenue: Rs17,051m (up 25% from FY14F).
• Sales breakdown: Soaps and detergents (47%), Home care (38%), Personal care (9%), Laundry business (4%), Others (1%).

Margin Expansion Strategies

• Focus on high-margin brands (e.g., Ujala, Henko, Margo).
• Increase share of premium detergents and liquids in Maxo.
• Improve operational efficiencies and cost control.
• EBITDA margin: Expected to rise to 14% in FY14 and 14.8% in FY15.
• Net margin: Expected to recover to 8.2% in FY14 and 10% in FY15.

Valuation Analysis

• Target price of Rs210 is based on 20x FY15F PER.
• DCF valuation gives an intrinsic value of Rs251, 20% higher than the PER-based target price.
• Sector average PER: 25.7x (FY15F), and JYL is trading at a 45% discount.
• Peer comparison: JYL is valued lower than major FMCG players like Hindustan Unilever and Dabur India.

Financial Strength and Capital Structure

• Asset-light with 70% of noncurrent assets as intangible assets.
• Free cash flow (FY14F-15F): Rs0.7bn to Rs1.3bn.
• Debt repayment plan: Rs680m in FY14, with Rs170m quarterly.
• Dividend payout: Expected to be 35% of earnings, though not explicitly disclosed.
• Cash conversion cycle: Expected to improve gradually with better supplier bargaining power and inventory management.

Key Information

Growth Drivers

• Integration with Henkel India has improved operational efficiency.
• New brand communication and packaging have boosted sales and brand visibility.
• Focus on power brands to increase market share and profitability.
• Expansion into new markets and product categories.

Challenges

• Low FMCG penetration in rural areas.
• High ad-spend in FY14 (12% of sales).
• Debt management and potential capital raising to improve financial health.

Outlook

• Strong growth expected across multiple segments.
• Margin recovery is anticipated with improved cost control and brand performance.
• Valuation is undervalued compared to sector peers, with upside potential.
• Strategic moves like brand extension and innovation are expected to support long-term growth.

Conclusion

JYL has a solid growth story, supported by its diverse product portfolio, integration with Henkel India, and strategic restructuring. With a BUY recommendation and a target price of Rs210, the stock offers a 35% upside from the current price. The company's focus on power brands, operational efficiency, and market expansion is expected to drive revenue and margin growth over the next few years, making it an attractive investment opportunity.