Jyothy Laboratories: Brightening up

With GST blues behind it, the company is set to benefit improving demand and ad spends

The Jyothy Laboratories (JLL) stock is a good buy for investors with a one to two-year perspective. With the hiccups from the GST transition behind it, the company is well-poised to see volumes picking up in the second half of this fiscal. Improving rural demand, product launches/relaunches and increasing advertising spends will also benefit the company.

Henkel’s decision to not exercise its option of buying a stake in JLL has seen the stock correct in the last few weeks. It now trades about 15 per cent below its one-year high seen in mid-September 2017, making this a good entry point for investors. Valuations too seem attractive relative to bigger peers in the FMCG segment. Although valuations for many midcap stocks have become stiff, JLL is still valued at a good discount to FMCG industry behemoths such Hindustan Unilever, Godrej Consumer, Dabur and Marico. It trades at about 33 times its trailing twelve-month earnings, while these bigger peers trade at 48-58 times.

On road to recovery

JLL predominantly operates in the fabric care (Ujala, Henko), dishwash (Exo, Pril) , personal care (Fa, Margo) and household insecticides (Maxo) segments. Fabric care brings in 40-45 per cent of the revenues and dishwash 30 per cent. The other two segments chip in with 12 per cent each.

JLL was quick to come out of the impact of demonetisation. In the December 2016 and the March 2017 quarters, the company recorded sales growth of about 3-4 per cent in each of the quarters, backed by around 3-5 per cent volume growth. But the transition to GST took the wind out of its sails. With about 79 per cent of its revenues coming through general trade and, in that, a good chunk through the wholesale segment, the company’s topline took a hit. The non-procurement by the CSD (canteen stores department) and strike by distributors in Kerala, a key market for JLL, did not help either. Sales for the quarter ended June 2017 dipped 15 per cent.

However, the company is on the recovery path. In the quarter ended September 2017, overall volumes growth came in at 3.5 per cent. Sales (adjusted for GST impact) grew by 9.6 per cent. All major segments contributed to the growth.

Triggers for growth

In the months to come, the company is well-poised to record double-digit volume growth. For one, disruptions in the distribution channels due to GST transition are expected to be ironed out further. Next, although pockets of farm distress exist, the overall rural demand has been picking up well in recent months, thanks to budget measures to boost rural incomes, farm loan waivers and good monsoons.

Rural sales contribute 30-40 per cent of revenues for JLL. Also, the company is also using launches/refreshes and spending more on advertising to boost volumes. In the last year, for instance, the company has relaunched the Ujala Crisp and Shine stiffner, and Margo soap. The Pril Dishwash Bar (500 gm tub) was launched towards the end of last fiscal. A new advertising campaign for Pril liquid and Ujala detergent began earlier this fiscal and new campaign for Ujala Supreme ( whitener) is slated for this quarter.

The insecticides segment, which has been the company’s Achilles heel, has also benefited from launches. JLL recently brought out the Maxo Genius machine (liquid vapouriser — mosquito repllent), which automatically shifts from defend to attack mode or vice-versa for maximum effectiveness.

Besides, clarity on Henkel’s stand after months of uncertainty will help the company. In 2011, Henkel had sold its Indian FMCG business (Henko, Pril, Fa and Margo brands) to JLL. As per the agreement dated May 5, 2011, the German company had the option to acquire a 26 per cent stake in the Indian firm, beginning the fifth year (that is, May 5, 2016) until the sixth year, or until a mutually extended period. Earlier this year, the end date was extended to October 31, 2017.

The acquisition of an at least 25 per cent stake in Jyothy Labs would have required a mandatory open offer to other shareholders for an additional 26 per cent as per SEBI rules, probably resulting in Henkel getting controlling stake. But Henkel recently made it clear that it would not exercise this option. Though the stock took a beating after this announcement, this clarity will now help JLL do whatever investments it wants to, in order to builds its brands, improve its presence and market share.

Financials

For the three months ended September 2017, the company’s revenue stood at ₹430 crore, showing a 9.6 per cent growth (adjusted for GST impact) over the same period year. Advertising and promotion expenses as a percentage of sales was 8.1 per cent versus 7.3 per cent last year. Yet, operating margin expanded to 16.4 per cent, from 14.9 per cent a year ago, helped by lower other expenses and better gross margins.

Net profit grew about 46 per cent y-o-y to ₹45. 7 crore, helped by lower interest expenses. Given that crude oil derivatives are used as inputs, input cost pressures may come up in the next two to three quarters due to rising crude oil prices. Besides, the company is also upping its advertising spends.

However, with demand firming up, it should be able to pass on cost escalations as price increases to a certain extent. Besides, savings in logistics/supply chain costs from GST should also help.

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