Antique recommends HOLD for Jyothy Laboratories Ltd

Jyothy Laboratories Limited - Consumer demand remains subdued; Promotional activities increase

We met with Mrs Neetu Kashiramka, GM-finance, Jyothy Laboratories, to discuss the on-ground consumer environment and ascertained that no material change is visible in 3QFY16 versus 2Q. The competitive intensity increased in 3Q, with promotional activities in the dish wash segment, where the company reacted to stiff competition from market leader Vim (HUVR) by offering 30% extra grammage on smaller SKUs like the INR5/10 bars. HUVR started promotions on Vim bar by offering free liquid pouches. Jyothy Labs also unveiled a new packaging and SKUs for Exo dish wash: a 250gm variant priced at INR28 with a free scrubber and INR10 off on 750gm at INR60. The management said offers have now started to reduce in detergents, with market leader HUVR reducing promotions. However, P&G continues to remain quite aggressive in this segment, offering 1+1 on Ariel, indicating its intent to not lose market share. The company will be negatively impacted if the draft GST proposal goes through, as its RnR was ~12-13% (standard rate proposed is 17-19%), which was low because of the 5% VAT levied on Ujala Supreme. However, due to mix shifting away from Ujala Supreme, the adverse effect (~2% negative impact) could reduce.

Still remain bullish on household insecticides; Gains market share overall

Jyothy Labs has also inched closer to the top three positions in household insecticides by gaining market share from both All-Out (SC Johnson) and Mortein (Reckitt Benckiser). At present, Good Knight (GCPL) remains the undisputed market leader. For second and third rung players, Mortein and All-Out, respectively, are not really their focus products, thus benefitting the company. It has emerged the number three player in liquid vaporisers (LV), toppling Mortein, which has slipped to the fourth position, and All-Out that holds the number two slot. In coils, Mortein continues to remain second, while Jyothy Labs is third. The management remained bullish about this category and still considers this leg of the business to be one of the biggest growth drivers going forward. Profitability in this category will remain muted in the medium-term as the company still derives 80% of its volumes from coils, which are typically low-margin products (gross margin:17-18%), while it is gradually gaining traction in high margin LVs (gross margin: 50%).

Henkel's open offer: Talks will only take shape post Apr-16

The management remains confident on their stance that Henkel should open up its product portfolio by launching products in similar categories as Jyothy Labs is already present in or is in adjacent categories at 'disruptive' prices. The whole procedure may or may not trigger an open offer and depends on whether Henkel wishes to acquire a 26% stake or will stop just short of 25% (~24.99%). There are possibilities that Henkel might depute some senior management personnel to run the business going forward. The management is exploring several options of executing the whole deal, while it continues to work on products it may want to launch post Henkel's entry into the company.

Maintain Hold with a target price of INR310 per share

The stock has already run up 16% in the last 12 months on anticipation of an open offer from Henkel, which plans to acquire 26% stake in Jyothy Labs. However, the company's competitive positioning does not really place it in a lucrative position in categories like household insecticides, where it will continue to invest behind brands, and detergents, where competition is emerging from deep-pocketed stalwarts like HUVR and P&G. The management will strive for 10% value growth in FY16 and attain 15% margin on the standalone business, given favourable raw material prices. Detergents are expected to see flattish value growth, despite a high single-digit volume growth, due to heavy discounting and promotional offers in the market across all players. With HUVR reducing promotional offers gradually, pricing could turn positive again. Jyothy Labs being a marginal player will be the last one to reduce offers, hence we don't see any material changes on that front until 1QFY17, which is when all players will see benefits of lower crude oil prices in their base and will look to reduce promotional spends. Hence, we maintain our FY16/17 EPS estimate at INR8/8.5, respectively. The stock is currently trading at 35x FY17 reported EPS. We maintain our Hold rating on the stock with a target price of INR310 per share.

Shares of JYOTHY LABORATORIES LTD. was last trading in BSE at Rs.302.85 as compared to the previous close of Rs. 298.95. The total number of shares traded during the day was 1130 in over 69 trades.

The stock hit an intraday high of Rs. 303 and intraday low of 299. The net turnover during the day was Rs. 339944.

Source : Equity Bulls

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