Jyothy Laboratories Ltd. - PINC Initiating Coverage

Jyothy Laboratories (Jyothy) manufactures fabric, home and personal care products and owns strong brands such as Ujala, Maxo and Exo. Jyothy has diversified into the laundry business. Its sales and earnings grew at 18% and 13% CAGR over FY07-10 respectively. We expect 28% and 37% sales and earnings CAGR respectively over FY10-12E. Consequently, we expect RoE to improve from 19% in FY10 to 25% in FY12 and drive a re-rating from 11x (two years median) to 16x FY12.

Laundry Services – scalable

Jyothy has a capacity of 40k units per day and serves institutional clients (~90%). It started retail services in Q3FY10 and currently has 35 outlets in Bangalore with plans to add 10 more in FY11. We expect laundry to contribute 5% to sales and 9% of EBITDA in FY12E. With a centralized washing facility Jyothy has mastered this model operationally and can extend it to other cities.

Outdoor repellants – a large opportunity

A contract with DRDO gives Jyothy access to world-class mosquito repellent technology. This product is far superior to products available in the market. We expect it to contribute 8% to sales and 13% to EBITDA in FY12E.

Opportunities galore

We have not factored in opportunities such as: 1) exports of outdoor repellants; 2) expansion of the laundry to other cities; and 3) the BOOT contract with Indian Railways.

VALUATIONS AND RECOMMENDATION

We expect 37% earnings CAGR over FY10-12E to improve RoE from 19% to 25% and drive re-rating from 11x (two-year median) to 16x FY12 FD EPS. We initiate coverage on the stock with a 'BUY' recommendation and a TP of Rs307, implying 20% upside to the CMP.

Source : Equity Bulls

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