Jyothy Laboratories - Positives in the price - Antique

Focus on revenues incrementally, over cost control

Post the restructuring of manufacturing and distribution, JYL (Jyothy Lab) management is focusing on improving its product mix as majority of the cost reduction initiatives, have been already executed. Therefore in the medium to longer-term basis, a richer product mix would facilitate margins in a scenario of input cost inflation.

Brand and geographical extensions backed by higher ad-spends to lead revenue growth

The growth in revenues and a richer product mix would be achieved through a mixture of 1)brand extensions 2) geographical extensions and 3) higher ad-spends. A) In fabric care the company plans to tap the INR50bn market comprising of Premium - INR25bn and Mid Priced - INR25bn. This will be through extending the freshly re-launched Ujala detergent powder to newer geographies and the planned re-launch of Henko within the next 2 quarters. B) In insect repellants, JYL plans to double its share in aerosols and liquid vaporizers. Particularly in liquid vaporizers, the company plans to launch an innovative machine in the next two months. JYL would utilize its dominant geographies, south and west to gain market share. C) In dishwash, the strategy of the company would be to grow outside South India by tapping the bar segment (INR15bn) through Exo and liquid segment (INR2-2.5bn) through Pril. D) In personal care, JYL is tapping the heritage franchisee of Margo, by extending the brand beyond toilet soaps and the international legacy of 'Fa' in deodorants and talcum powder.

Input inflation re-surfacing with depreciating INR

The JYL management expects to see price hikes going ahead across FMCG categories with the rising inflation in input cost. As stated earlier, the management plans to meet such a scenario through a richer product mix. However in the short-term, price hikes could be initiated particularly in categories like detergents and personal care.

Outlook and Valuation

Post the interaction with JYL management we maintain our earnings estimates for FY14e and FY15e at INR5.4 and INR7.3 (assuming a net sales growth of 20% CAGR during FY13-15 and an EBITDA margin of 13.2% and 13.6%). In our view, the best-case scenario, comprising of an EPS of INR9.3 during FY15e, assuming a net sales CAGR of 27% in FY13-FY15e and an EBITDA margin of 14.6% in FY15e, would be difficult in a scenario of demand slowdown and rising inflation. We therefore downgrade the stock to SELL at the current PE valuations of 35.7x FY14e and 26.2x FY15e.

Source : Equity Bulls

Keywords