Jyothy Laboratories - Q2FY14 Update, CMP Rs.183, Rating changed to HOLD, Target Rs.186 - Sushil Finance

JLL reported strong performance with healthy volume growth & profitability for Q2FY14. Key points pertaining to results and discussed in the concall are summarized below:

Key Highlights of Q2FY14 Results

JLL's Performance: Net Sales grew 33% YoY to Rs.3060.9 mn with volume & price growth of 25% & 8% resp. Reported gross margins of 47% (+90 bps YoY). EBITDA grew 100% YoY to Rs.426.6 mn with EBITDA margin of 13.9% (+467 bps YoY) which expanded largely due to lower Employee cost as % of sales (-357 bps YoY) but contracted QoQ by 130 bps due to higher sales contribution from low margin Maxo vis-à-vis higher contribution from high margin Ujala Fabric Whitener in Q1FY14. Adj. PAT grew 1579.1% YoY to Rs.222.4 mn with APAT margin of 7.3% (+669 bps YoY). EPS stood at Rs.1.26 vs. Rs. 0.08 in Q2FY13.

JLL's Segmental Performance: Soaps & Detergents grew 35.2% YoY to Rs.2275.2 mn contributing 74.4% to its net sales with EBIT margin of 14.1% (+861 bps YoY) while Home care grew 36.6% YoY to Rs.776.1 mn contributing 25.4% to its net sales with EBIT margin of 2.7% (-90 bps YoY). Others de-grew 8.1% YoY to Rs.43.9 mn contributing 1.4% to its net sales with EBIT margin of 1.5% (-365 bps YoY).

Strong Growth from Power Brands: Power brands grew 36% YoY. Sales from Ujala fabric whitener grew 77.5% YoY to Rs.611.8 mn, Maxo grew 33.1% YoY to Rs.520.1 mn, dishwash portfolio grew ~24% YoY & Henko grew ~18-20% YoY during Q2FY14. Highlighted that positive impact on market share will be visible from the coming quarters as brand investments have kicked in only from Q1FY14.

Healthy Growth from Non-South Markets:Non-south sales grew 42% YoY with 67% of overall media budget invested in Non-south markets & Non-south media investments grew 125% in Q2FY14. JLL's efforts to take regional brands national started showing initial signs of paying dividends as sales contribution from Non-south increased to 55% in Q2FY14 from 49% in Q1FY13.

Key Points from Conference call of JLL

- Highlighted that sales growth has not come due to up-stocking at the distributors' level as distributors continue to maintain only normal inventory of 30 days. Sales was also impacted in Q2FY14 due to distribution problems in some parts of Andhra Pradesh, floods in many parts of the country (Gujarat, MP, etc) & weak performance of Maxo in Uttar Pradesh due to weather. Rs.6 Cr inflationary cost pressure esp. freight impacted EBITDA margins by ~200 bps.

- Detergent sales growth was slower than other categories for JLL due to intense price/promotion war by the competitors to gain market share in Q2FY14. Highlighted that premiumization/upgradation in Detergents & Fabric Whitener will continue to drive growth for JLL in H2FY14. Also expects to grow detergent & Household Insecticides through breakthrough innovations in the next 3-4 months (from Q4FY14).

- Confident of achieving its earlier guidance of 20-25% top-line growth & 14-15% EBITDA margins in FY14 despite inflationary trends. Aims to maintain Q2FY14 gross margins (~47%) for H2FY14. Not considering for any price hike as of now instead focusing on volume growth & gaining market share. Maintained it earlier guidance for ~10-12% A&P spends as a percentage of sales in FY14E.

- Expects Urban India (Large Cities/Metros) to continue to underperform in terms of growth till election terms vis-à-vis Rural India.

- Laundry segment (Jyothy Fabricare Services Ltd) reported sales of Rs.28 Cr with Rs.2 Cr EBITDA loss for H1FY14. Expect to close FY14 with Rs.56 Cr and positive EBITDA.

- Started commercial operations for production of Ujala in Bangladesh on 29th Aug, 2013.

- Plans to replace its current debt of Rs.635 Cr (~11% interest rate) with Rs.400 Cr of 3-year zero-coupon NCDs & Rs.250 Cr of preferential allotment to promoters (15mn shares at ~Rs.167/sh). Rationale for this fund raising was to grow the business as currently the cash profits generated are being utilized to pay interest amount (Rs. 15 Cr per qtr) & debt repayment (Rs. 68 Cr per qtr).

OUTLOOK & VALUATION

Considering healthy performance post-merger of JCPL & plans to replace its current debt to improve cash situation, we expect JLL's Standalone Rev to grow by 19.9% & 20.0% in FY14E & FY15E resp. At the CMP of Rs.183, the stock is trading at 30.4x & 17.0x its FY14E & FY15E EPS of Rs.6.0 & Rs.10.8 resp. We change our rating to 'Hold' with a TP of Rs.186 based on SOTP. We have valued JLL standalone biz at 21x (5% disc to 5-Yrs Avg Fwd PE) its FY15E adj. EPS of Rs.8.4 assuming 11% interest cost on Rs.400 Cr NCD & 75.09% stake in JFSL at 50% discount to its enterprise value of Rs.400 Cr. (For valuation, we have adj. FY15E EPS of Rs.10.8 to Rs.8.4 taking impact of interest cost on NCD in P&L).

Source : Equity Bulls

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