Jyothy Laboratories - Fund raising (if any) not materially earnings accretive; Sell - Anand Rathi

According to news articles, Jyothy Laboratories (Jyothy) is raising Rs.5.5bn via sale of equity to PE players. This could enhance EPS, but by a meagre 0.4-3.3%. We retain Sell on the stock, considering limited positives from the dilution.

EPS to rise marginally. There have been news flows citing fund raising by Jyothy of up to Rs.5.5bn by selling equity stake to private equity players. We assume, if the company raises Rs.5.5bn, it will have to issue 2.7m to 3.2m shares at prices of Rs.170-205. This could entail savings in interest cost and higher other income. However, adjusting for additional income taxes as well as dilution, FY14e EPS stands to rise only 0.4-3.3% (minus possible synergies).

Operational synergies. We expect the dilution to make Jyothy debt free, driving operational performance. The company will thus be in a better position to introduce new products and re-launch existing products as well as allocate more money for ad-spend and promotions.

Outlook. We believe the ongoing distribution restructuring would lead to volatile sales and also induce an initial slowdown, as the company would have to cut its own depots and distributor margins 200bps. Also, the relaunch of brands such as Margo, Exo and Maxo would result in higher ad-spends and continue to eat into margins. Moreover, with no land sale in FY13, the company will continue to pay higher interest cost in 2HFY13.

Valuation. We value the stock at Rs.130 at target PE of 22x FY14e earnings. Any dilution may lead to spurt in stock price. However, we believe, weaker results over the next 3-4 quarters will result in muted stock price performance. Risk. Lower raw material prices.

Source : Equity Bulls

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