Jyothy Laboratories - Not as White As Snow

The FMCG sector is billed to be a safe bet in uncertain times for the market. An expectation of a normal monsoon further adds to the appeal of stocks in this sector. While investors would be looking out for opportunities to take a meaningful exposure to the sector there is every chance that stocks which make lot of noise in the market figure quite high on their list. One such company is Jyothy Laboratories (JLL).

Over the years Jyothy has evolved to be a market leader in the niche fabric whitener category with its flagship brand ‘Ujala’ (market share by value of 73 per cent in as on Dec 2010). Its nearest competitor is Robin Blue which has a mere 4 per cent market share and the rest of the market is with the unorganised segment. The brand Ujala has witnessed CAGR growth of 18 per cent from FY2007 to FY2010.

Being a market leader in the fabric whitener space, the company is in a position to determine the prices without facing any resistance. However, despite a huge market share in the fabric whitener segment the brand has witnessed growth of only 4 per cent from 2008–10. Also, the company is heavily dependent on this brand with almost 51 per cent of the topline coming from it.

Diversifying itself, the company entered the Rs 2,000 crore industry for mosquito repellents with the brand name ‘Maxo’. Here the company enjoys a 12 per cent market share. The brand leader in this segment is Godrej with a 33 per cent market share. This segment has witnessed a CAGR of 8 per cent from FY2007 to FY2010. The market for this segment has been growing at a CAGR of 10 per cent since 2001. Jyothy prices its products a shade below its competitors in this segment but this is not really helping the company to improve its sales.

The company is looking at extending its brand (Maxo) to the aerosols segment. It is also looking at applying a new technology called DEPA (Diethyl Phenyl Acetamide). The products in this category will be launched in association with DRDO for which it has already formed a JV. Branded as Maxo Military, it has test-marketed the same in Kerala in and has witnessed a good response to it. In March, 2010 the Defence Research & Development Organisation (DRDO) assigned JLL the exclusive rights to develop and sell products based on DEPA (multiinsect repellent technology) products in various formulations (through its established brand Maxo) in the Indian and international markets.

JLL has acquired a majority stake in Henkel India where it got hold of 50.97 per cent of the equity from the German parent company Henkel AG at a price of Rs 20 per share. This is in addition to the earlier 14.9 per cent that it had acquired from Tamil Nadu Petroproducts. For the latest acquisition JLL has taken a loan of Rs 600 crore which will be entirely shown in the balance-sheet of JLL. With this loan JLL would be paying off the Rs 453 crore debt that Henkel India has on their books and also buy the parent’s preference share capital in Henkel India of Rs 68 crore for a consideration of Rs 43 crore. JLL intends to merge both the companies going forward.

On the debt part the company is planning to bring down the debt in the range of Rs 200 to Rs 300 crore for which they may sell out some of the portions of the unused land owned by JLL as well as Henkel India. Both the companies will have a distributor network of 4,250 which is a sizeable number. The acquisition will provide the company with a perfect synergy of penetration in rural and urban India. JLL’s 70 per cent turnover comes from rural India while 30 per cent comes from urban India and in the case of Henkel India the ratio is reverse wherein 75 per cent comes from urban India and the rest from rural India.

With this acquisition JLL will be able to cater to the entire segment of detergent powders and together they will enjoy a market share of 7 to 8 per cent in the detergent market. The company will now be present in the entire chain of the detergent segments, including premium as well as entry level products. Though new brand acquisitions will help the company going forward, the overall scenario in this industry is very competitive and it will face a lot of headwinds going forward.

The company has not performed well for FY11. Its topline witnessed a growth of just about 3.58 per cent on a YoY basis for FY11 and stands at Rs 619 crore as against Rs 598 in FY10. The bottomline witnessed a degrowth of 7.50 per cent on a YoY basis for FY11 and stands at Rs 68.76 crore as against Rs 74.34 in FY10. On the margins front the company has witnessed a decline of 356 basis points and 133 basis points respectively for its EBITDA and net profit margins on a YoY basis for FY11. The reason being, increase in raw material cost as percentage of sales from 84 per cent of sales in FY10 to 88 per cent of sales in FY11. Moreover, in the soaps and detergents segment it witnessed growth of 13.5 per cent while the home care division witnessed decline of 10.2 per cent in the revenues for FY11. This points to the fact that on the financial front there is nothing very encouraging at this moment.

On the valuation front the stock trades at a P/E of 23.92 times which is on the cheaper side as compared to its peers like HUL and ITC. What really need to be looked at are the recent developments that have happened in the company. The recent debt it raised for acquisition of Henkel India will increase company’s debt to equity ratio virtually from debt free to little more than one time. We believe in the rising interest rate scenario the leveraged balance sheet will put strain on the company’s financial which is already struggling with the rising raw material cost. Additionaly the company has not shown very promising results in FY11. Going forward the interest burden will further act on the company’s bottomline. As company is operating in a highly competitive space where price wars have been very common. This would not allow it to go in for higher product prices and consequently would weigh heavily on its margins. For now it is best to keep away from the stock, though it is creating a lot of buzz in the market.