Jyothy laboratories acquisition of henkel india


(Rakesh) #1
INTRODUCTION
Mergers and acquisitions (M&A) are no longer a new thing to the Indian Business Sector. Today, M&A are not only a part of the business growth strategy but have become a necessity to survive in the ever growing competition and add value to the existing business line so as to retain as well as grow the market share.
In India, March 2011 saw the acquisition of Henkel India by Jyothy Laboratories. At one shot, the three-brand company leapt into the big league with six new brands in its stable, namely, Henko, Mr. White, Fa, Pril, Margo and Neem.
The acquisition fulfilled Jyothy's primary aim of de-risking its portfolio, which relied in a big way on a single brand, Ujala Supreme- a fabric whitener, which contributed 32 per cent to its turnover.
In the last few years, Jyothy has tried diversifying into detergents (Ujala washing powder, Ujala Stiff and Shine, and Ujala Technobright), dishwash (Exo) and mosquito repellents (Maxo), but competition in these categories has made the going tough.
With a product portfolio close to its own, Henkel fits perfectly with Jyothy's ambitious growth plans.
But then the operational turnaround of Henkel India is a big challenge in itself; plus the Rs. 600-crore (Rs. 6 billion) borrowings on Jyothy's books will further test the soap and detergent maker's ability to turn the new venture profitable.
THE COMPANIES:
Jyothy Laboratories
Jyothy Laboratories came into being in 1983 and was started by M.P. Ramachandran - the current Chairman & Managing Director.
* It started as a proprietary concern, manufacturing and selling a single product in a single district. The organization today stands as a multi-brand, multi-product company with operations all over the nation.
* The company has the distinction of making a mark in the virtually non-existent category of liquid fabric whitener.
* Today, Jyothy Laboratories Limited has a pan Indian presence with brands catering to the needs of consumers across the length and breadth of the nation. It has 28 manufacturing facilities in 16 locations across the country.
* From starting operations with a corpus of INR 40,000 to a company with a turnover of overINR 400 crores, Jyothy Laboratories Limited has come a long way.
Henkel India
* Henkel India is a joint venture between Germany's âHenkel & Co.â and Spic Group's Tamil Nadu Petro Products, with the German firm holding 51 per cent stake.
* Henkel India., established in 1987 is a subsidiary of Henkel AG & Co. KGaA, Germany.
* Headquartered at Chennai in India, Henkel India, operates in business areas of Laundry, Home Care, Cosmetics, Toiletries and Hair Care.
* Henkel operates in three categories â âlaundry and home careâ, âcosmetics and toiletriesâ and âadhesives and sealantsâ. It comprises of national and international brands such as:
Pril
Bref
Mr. White
Henko
Igora Royal
Chek
Fa
BC Bonacure
Glatt & Natural Styling
Margo
Strait Therapy
Osis
FMCG SECTOR IN INDIA
* The Indian FMCG sector, with a market size of USD 25 billion (2008â09 retail sales), constitutes approximately 2.15 per cent of Indiaâs GDP.
* The industry is poised to grow at CAGR between 10 to 12 per cent annually.
* Annual profit of FMCG sector is approximately USD 14.74 billion.
* Market growth rate â
o Rural - 40 per cent
o Urban - 25 per cent
* Average Indian spending on groceries and personal care is 48 per cent.
o Groceries - 40 per cent
o Personal Care - 8 per cent.
* Implementation of the proposed GST and opening of FDI are expected to fuel growth of industryâs size to USD 47 billion (Rs 2,25,000 crores) by 2013 and USD 95 billion (Rs 4,56,000 crores) by 2018.
(- data as per FICCI- TECHNOPAK Report 2008-09)


THE ACQUISITION
In March 2011, Jyothy Laboratories Ltd. acquired 14.9 per cent stake in Henkel India Limited, making it the single largest Indian shareholder in the company. This strategic bid was strengthen its brand portfolio in Urban and Rural India.
Jyothy Laboratories Ltd. (JLL) further acquired Henkel AG and Co. KGaA's 50.97 per cent stake in its Indian unit for Rs. 142.9 crores.
The acquisition helped JL to ramp up its share in the fast-growing detergents market, dominated by deep-pocket multinational giants Hindustan Unilever (HUL) and Procter & Gamble (P&G). It also helped JL to strengthen their urban distribution network as Henkel has a strong presence in modern retail formats while JL still remains strong in the rural areas.
Unlike many of the recent cases of mergers & acquisitions the Jyothy Lab & Henkel India went pretty smoothly without much of twists and turns though there were some of the minor issues.
These issues are as follows:
* Emami, Wipro and Dabur were in competition with JLL for Henkel Indiaâs Acquisition. More competition leading to a bidding price war for acquisition- Higher Prices!
* The acquisition was to be EPS dilutive initially as Henkel India was suffering from losses.
* Huge Debt (Rs 4.54 billion) of Henkel India was expected to drag down the financials of Jyothy Laboratories in the form of Interest cost burden in the P&L account.
But the management was confident about its decision and decided to go ahead with the acquisition as the expected combined benefits in the long term were comparatively more than the short term problems.
The acquisition being fairly recent, itâs too soon to comment on it, though we can look out for the synergies, the possible benefits to be achieved as well as the problems which may arise.
It is only time which will tell how right or wrong this decision was.
FINANCIALS
* In March 2011, Jyothy Laboratories bought 1,73,51,686 (14.9 per cent) shares at Rs.35 each of Henkel India Limited from SPIC group company Tamil Nadu Petroproducts Ltd. (TNPL).
* The entire transaction was an all cash deal amounting to Rs. 60.73 crores.
* The company later participated in the bidding process to gain Henkel AG's 50.9% stake in Henkel India Limited.
* In line with the plan, Jyothy Laboratories offered to buy Henkel AG's 50.97 per cent stake in Henkel India at a discount after it paid Rs 35 per share to snap up the earlier 14.9 per cent stake from the latter's joint venture partner A C Muthiah.
* In May 2011, JLL bought Henkel AG's majority stake in Henkel India for Rs. 617 crores, including debt and preference shares.
* JLL paid Rs. 118.7 crores, or Rs. 20 for each share, for the German firm's 50.97% stake in Henkel India.
* JLL also agreed to assume and refinance Henkel's Rs. 454-crore debt and buy more than 68 million preference shares worth Rs. 43.9 crores.
* The total costs of the deal went to a total of around Rs. 678 crores where in JLL acquired 65.69 per cent stake in Henkel India.



SYNERGIES
* Diversified Product Portfolio:
JLL through the acquisition fulfilled its primary aim of de-risking its portfolio, which relied in a big way on a single brand, Ujala Supreme- a fabric whitener, which contributed 32 per cent to its turnover.
With Henkel to its side JLL- a three-brand company, at one shot, leapt into the big league with six new brands in its stable, namely, Henko, Mr. White, Fa, Pril, Margo and Neem.
* Branding and Manufacturing Synergies- Common Presence:
Both Jyothy Laboratories and Henkel India have synergy in various business segments, as both are present in Home Care, Fabric Care, Dish wash, Personal Care and Household cleaning segments.
Manufacturing was to be the first area of rework. Product formulations remained the same, but manufacturing was decentralized for Henkel brands. The 28 factories that Jyothy Labs had at its disposal, absorbed the Henkel brands.
Investments were made to the tune of Rs. 5-10 crore (Rs. 50-100 million) on packaging lines and a high-end laboratory facility.
By trimming the 20-odd contract manufacturers of Henkel and moving production of Henkel brands in-house, JLL expected gross margins to touch 38 per cent by the end of 2011.
* Stronger Distribution Network:
The acquisition helped to strengthen JLLâs urban distribution network, as Henkel has a strong presence in modern retail formats. While Jyothy is more rural-oriented with sales mix being 65:35 in favor of rural and urban, Henkel is more urban centric with a ratio of 75:25.
As per the statements given out by JLL, they plan to achieve a sales mix of the merged entity as 50:50 for rural and urban by 2012-13. However, it is to be skewed more in favor of rural area thereafter, since 70 per cent of Indiaâs 1.2 billion population lives in rural areas and there is immense scope to improve availability of products.
With a reconfigured supply chain, logistics costs will drop drastically. JLL's target is to reduce logistics costs from 7-8 per cent of sales to 4 per cent.
* Management Abilities:
JLL is known for its management quality and the company is very sure about the success of the merger. The performance of JLL over the years has shown that the management of JLL has the ability to turnaround the business operations for Henkel India Ltd.
* Taxation:
The acquisition and merger of JLL and Henkel India will be advantageous for JLL as the accumulated losses of Henkel India will come handy to save on taxes.
* Raw material synergies:
Raw material synergies are expected to reduce costs as unlike in the past, Jyothy does not have an obligation to source a key ingredient for detergents- LAB (i.e., linear alkyl benzene), from Tamilnadu Petroproducts.
Purchases for both the companies will follow the Jyothy way - cash and carry - to ensure better leverage at the time of negotiation. This will, over a period of time, drive down material and procurement costs, positively impacting overall EBITDA (earnings before interest tax depreciation and amortization) margins which have been in the negative for Henkel India since inception.
* Combined Office:
Jyothy planned to shift the corporate office to Henkel Indiaâs Mumbai premises in September from Chennai, saving the company Rs. 1.5 crores in rent, a year.


Summary for synergies:
The Jyothy success story has many components, but the key ingredient has been its ability to focus its efforts sharply on its key brands, and build volumes market by market.
This has allowed it an ability to invest in these brands as well to keep its eye on sustaining a product advantage vis-a-vis its competitors.
The challenge for Jyothy is to display the same intensity of effort behind the Henkel brands. It would perhaps make sense for it to clearly spell its ambitions for each brand and category and to sharply prioritize it's actions.
For a company like Jyothy, it would be a mistake to spread its efforts thinly, and to toggle between the new brand assets it has acquired. That is what the problem with Henkel was and that is also what Jyothy is not naturally good at. It needs to take things category by category and aim for significant share gains in selected categories.
Having set its priorities, there is a need to build powerful ideas behind the selected brands. The current Henkel approach has been a pronouncedly me-too one, staying content with mimicking category leaders weakly and that is simply not good enough to continue.
JLL will need to be braver and take more chances; it needs to try and redefine some accepted category truths and operate as a feisty challenger that is at the forefront of innovation, be it in terms of the product or its marketing.
This is easier said than done, for the categories in question are extremely mature and well-established and do not offer too many easy opportunities for change.


REASONS FOR DISAPPOINTMENT
* The acquisition was to be EPS dilutive initially as Henkel India was suffering from losses. It has witnessed consolidated net loss of Rs. 518 million in CY 2010. Their accumulated loss stood at Rs. 3,657 million.
* Jyothy Laboratories is a debt-free company. Huge Debt (Rs 4.54 billion) of Henkel India is expected to drag down the financials of Jyothy Laboratories in the form of Interest cost burden in P&L. Henkel India also has got a Rs 680 million preferential allotment from the parent, which may be adding up to the debt.
* In a bid to buy out the German parent`s - Henkel AG balance 50.9% stake, Jyothy Laboratories ran the risk of being caught in a bidding war that would have increased its acquisition cost.
But later when Jyothy Labs picked up Spic chairman Muthiah's shares even as Henkel AG launched a bidding process to sell its stake in the Indian unit- a section of the analysts said that Jyothy may have created enough deterrence to dissuade other potential bidders and could be aggressive on price negotiations with Henkel.

THE SHARE MARKET
* The Jyothy Laboratories stock closed the day at Rs.228, down by Rs.1 or 0.44%. The stock hit an intraday high of Rs.233 and low of Rs.227.
* The total traded quantity was 653 compared to 2 week average of 3859.
* The Henkel India stock closed the day at Rs.45.35, up by Rs.2.15 or 4.98%. The stock hit an intraday high of Rs.45.35 and low of Rs.43.90.
* The total traded quantity was 1.37 lakhs compared to 2 week average of 1.35 lakhs.


JLLâs DECISION: RIGHT or WRONG?
There is no one way to describe the decision and as mentioned only time will be able to tell whether the decision was right or wrong.
But, on paper, the acquisition seems a great option for JLL as:
* JLL gets a bigger and better product portfolio
* The considered synergies are supposed to work in JLLâs favor
* The fact that JLL acquired Henkel India at a discounted price of Rs. 20 (which was almost half of the existing price of Henkel) is also to be considered.
* The post acquisition figures reflected by Henkel can also be taken as a sign in favor of Jyothy Labs.

CONCLUSION
Overall the acquisition seems to be a win-win scenario for JLL. Though the yearly performances are yet to come out, the synergies have already started working. The JLL management has handled the case very well and its forecasts and expectations if brought into reality will be a great factor in taking JLL to new heights in row of Multinational Giants like HUL, P&G etc.

(Ravikanth) #2

Hi Rakesh,

Congrats. This was a greatwrite up.

This was one of thesurprisingpicks that did really well for me when i bought a small lot at 140 before bonus.I would say the price paid for Henkel and the value that would add in long term should be huge opportunity for Jyothy labs.

The only thing i am not sure of is Management Quality.

1)Management quality- They seem to be doing well recently by declaring good dividends


(Subash Nayak) #3

Long back, this has been recommended by the PN Vijay of moneycontrol fame.

Not sure, whether this is cheap as current valuation of 30 PE. Still I love the different business model they follow (as compared to typical FMCG companies). Need to have a detailed analysis of this to decide whether to invest at current price or not.


(Hemant V Bhatia) #4

Highlights of the meet by Capital Market.

For Q2 FY14, the net sales have gone up by 33% to Rs 305.92 crore while net profit inclined by more than 999% to Rs 20.87 crore.

The OPM expanded by 466 bps to 13.9%. In an inflationary environment there was an impact of 2% of higher freight charges on the OPM which would have been absent in a normal business environment.

The top-line for the quarter was driven by 25% volume growth and 8% price/mix led growth. Apart from detergents business which grew slower versus other categories due to intense price/promotion war between top-2 players, all other power brands continue to post strong growth which has grown by 36%.

The mgmt said that in Q2 it has lost some amount of sales in Andhra Pradesh and Telangana due to the political instability and also due to the floods in Gujarat and Madhya Pradesh. Rest all the geographies have performed well for the company.

In detergent & soap segment, it has reported a 35% yoy growth led by a strong 77% growth in the Ujala whitener revenues, a 24% growth in dishwash portfolio and 18% - 20% growth in Henko

The mgmt attributed the strong performance to the company’s low market share in the detergents category, consumer uptrading to larger SKUs, market share gains from unorganized segment and decline in fake product sales post change in packaging.

The mgmt said that in detergent category top two players are running numerous price-offs/promotions and have also upped their share of voice in order to target higher market share. As a result, the growth was below expectation.

The company will re-launch the Henko in the next few months with a unique proposition. Henko is in Rs 2000 crore premium detergent segment.

Home care revenues was up 37%, driven by strong growth in Maxo as well as the other smaller brands in this segment. Maxo revenues grew 33%.

The company has invested strongly behind its brands with nearly 58% spike in ad spends and 31% jump in sales promotion for 1H FY14. The company has a ratio of 70:30 for above the line and below line spend. The company will have A&P spend at 10-12% of sales.

The company is planning to raise up to Rs 400 crore of nonconvertible debenture at zero coupon bonds, whose repayment has to be done after three years, in order to provide liquidity and drive growth as now the business has set in with the required sales and profitability growth. Also, the promoters will infuse Rs 250 crore by way of a preferential allotment of 1.5 crore shares by the end of Q3. Both these measures would help the company to pay its debt of Rs 635 crore as on September 30, 2013. Also, out of this total fund raising of about Rs 650 crore, the company is planning to acquire back IL&FS Trust Company stake in Jyothy Fabricare Service (JFSL) for about Rs 70 crore. The company would be acquiring 0.3 crore of compulsory convertible cumulative preference shares of Rs 10 each and 50000 equity shares of Rs 10 each in JFSL presently held by IL&FS.

The company has reduced its finished goods inventory from 55 days to 47 days and has partnered with IBM to achieve further inventory reduction of finished goods by 5 days from January 2014 onwards through efficiencies in forecasting/demand planning.

JFSL’s revenues for 1H FY14 are at Rs 28 crore with a loss at the EBITDA level of about Rs 2 crore, which the management feels would turn positive by March 2014. The mgmt expects JFSL to do top-line of ~Rs 28 crore for 2H FY14.

The company’s products are available through 2.9 million outlets in India and have direct reach of 1 million outlets. Though the company does not expect the number of distributors to increase from the current level, it expects the sub-stockist will increase by 20% from the current 2000 to 2400 by the end of FY14.

The mgmt has maintained its guidance of achieving around 22% - 25% revenue growth and OPM of 14% - 15% in FY14.


(Hemant V Bhatia) #5

Highlights of the meet by Capital Mkt:

For Q3 FY14, the net sales have gone up by 27% to Rs 297.43 crore while net profit inclined by 63% to Rs 27.38 crore. Volume grew by 22% while 5% was price/product mix growth. The dishwash and personal care grew higher versus overall volume growth while fabric care and HI grew slower.

The OPM declined by 124 bps to 14.26%. The decrease in margin is due to lower gross margins and increase in advertisement and sales promotion expenses. The mgmt said that future gross margin gains were likely to be driven by mix improvement like increased contribution from higher margin brands like Ujala, Henko and higher contribution from urban markets.

Soaps and Detergent business, which includes brands like Ujala, Henko, Exo, Pril, Margo, Mr. White, grew by 28% to Rs 240.4 crore. Ujala fabric whitener saw double digit growth. Ujala fabric whitener continues to be the market leader with a market share of 72.5% by value. There was a strong over 25% growth in the dishwash segment especially Exo bars. Pril posted a modest growth. Its market share has stabilized after entry of big competitor 9 months back. Detergent segment has seen moderation in growth due to competitive intensity, which has also impacted its margin.

Home Care, which includes mosquito repellant Maxo and Exo scrubber, saw revenues growth of 26% to Rs 56.4 crore. The growth is mainly on account of Maxo Liquid growth. The coils saw moderation due to a weak season. The company now focusing more on Maxo liquid and have target of increasing its contribution from present 24% to 50% in Household Insecticide business in next 2 â 3 years.

Others business which include brands like Fa and Neem saw revenue increase of 78.1% at Rs. 3.9 crore.

Apart from detergents business which grew slower than other categories due to intense price/promotion war between the top two players, all other power brands continued to post strong growth. Jyothy's brands have shown a volume growth of 24% while Henkel portfolio volume grew by 16%.

The company's value market share, as reported by Nielsen, has started showing YoY improvement across brands. Ujala fabric whitener share improved by 100 bps to 73%. Maxo coil share improved 300 bps to 17%. Maxo liquid share improved 100 bps to 5%. However, market shares in the Exo bar down by 100 bps to 10%

There was a 25% jump in advertising spends and a 211% rise in sales promotion expenses. The mgmt said that current quarter advertising spends were marginally lower than those in previous quarters due to seasonality. It did not spend on Maxo coils and Margo while spent on Ujala, Exo and Maxo liquids. The company has spend higher on sales promotion in detergents to combat high competitive intensity and Exo to improve distribution/availability. Going ahead, it expects sales promotion to stabilize.

The revenue contribution from non-South markets has seen consistent improvement and stood at 53% in Q3 FY14 against 47% a year earlier and 55% in 9M FY14 against 50% a year earlier. The company will continue to invest aggressively in expanding its share of revenue from non-South markets. It sees a great potential in non-south market due to low penetration of its products.

For FY15, the company will continue to build on Ujala fabric whitener's new platform through sustained marketing activity, will re-launch Henko with a completely new positioning and formulation in Q1 FY15, will extend Margo brand in skin care category and planned several activities for Maxo in FY15 including entry into low smoke coil and a break-through innovation in Maxo.

The company's standalone net debt has fallen to Rs462 crore from Rs 607 crore at the end of March 2013. The company has raised Rs 263 crore via preferential allotment of shares to promoter Group. The company has allotted 1.5 crore equity shares of Re 1 each at a price of Rs 175.15 per equity share. The company also raised Rs 400 crore through zero coupon non-convertible debentures (Redemption premium 11%) payable after three years to a group of investors in November 2013. Both these capital raising initiatives will help Company to reduce its Finance cost and grow both in an organic and inorganic way.

The company indicated worsening of working capital cycle in Q3, driven by higher CSD sales.

The mgmt said that it is exploring inorganic growth opportunities, mostly a regional brand, post successfully turning around Henkel after its acquisition.

JFSL (fabric spa business) recorded a revenue of Rs 30 core and an EBITDA loss of Rs 1.5 â 2 crore for the nine months. In terms of business units, Bangalore is EBITDA positive, Mumbai achieved breakeven while Delhi continues to bleed. JFSL near-term targets include EBITDA breakeven by Q4 FY14. The company is looking to expand in Chennai and Hyderabad.

The mgmt has maintained its guidance of achieving around 22% - 25% revenue growth and OPM of 14% - 15% in FY14.


(Hemant V Bhatia) #6

Highlights of the meet by Capital Mkt:

  • For Q4 FY14, the standalone net sales have gone up by 21% to Rs 329.9 crore while net profit inclined by 114% to Rs 29.2 crore. The operating margin declined by 320 bps to 9.1% on account of an increase in advertising spends. Advertising spends increased due to the company's focus on developing the Maxo brand. Maxo coil has lower gross margin.
  • The volume growth for the quarter was 15% and 6% price â mix led growth.
  • For FY14, the consolidated net sales have gone up by 23% to Rs 1251 crore while net profit inclined by 141% to Rs 106.1 crore. The operating margin inclined by 86 bps to 13%.
  • The management during the analyst meet spoke on re-launches of various products and increase in Advertising spends to improve the top-line and profitability.
  • In Q4, the soaps and detergents business grew 25% to Rs 227.77 crore, led by a 27% growth in fabric wash to Rs 140 crore and 33% growth in dish wash to Rs 82.5 crore. PBIT for soaps and detergents grew 24% to Rs 25.63 crore. PBIT margin for the segment was flat at 11.3%. Profitability was flat due to input cost pressures.
  • Ujala whitener registered a strong 43% revenue growth in FY14 which is commendable given stagnant category growth rates. The strong growth was aided by low base, price hikes, market share gains from competitors and incremental revenue share from counterfeits aided by new packaging launch.
  • The mgmt said the fabric whitener category is witnessing lackluster growth. Going ahead, management will continue to focus on Ujala whitener under strategy of :- gain market share from low-cost offerings by demonstrating proof of superiority: drive new users through new campaign targeting yellow color removal from clothes; and (launch low-cost sachets Re. 1 to target bottom-of-pyramid users
  • New campaigns in Ujala whitener will be on air in next few months and JYL is also looking to relaunch Ujala extensions â (1) Stiff N shine (fabric conditioner for color loads) in November 2014 and (2) Ujala detergents (currently available only in Kerala) in July 2014.
  • The company plans to re-launch Pril in July 2014.
  • The company has high expectations from the scrubber category. It has been posting strong double-digit growth in scrubber sales under Exo and plans to further scale it up through the launch of an antibacterial scrubber during July 2014.
  • In skin cleansing, the company has launch variant of Margo soap. From being a summer skin cleansing product, it now plans to transform it into a multi-season product. Brand sales would be driven by its extension to face wash through its unique positioning.
  • Revenues for the home care business increased 18% to Rs 99.06 crore, driven by a 23% growth in mosquito repellents. Mosquito repellent performance during the quarter was backed by Maxo liquids. However, home care segment posted a PBIT loss of Rs 0.8 crore due to high brand investments in Maxo liquids and the newly launched Maxo Low Smoke Coil.
  • During FY14, the company registered 25% growth in fabric care, 28% growth in dish wash segment, 18% growth in mosquito repellents and 28% growth in personal care. Except Fa, all brands have delivered good growth. The mgmt said that presently it will not focus on Fa and it will have 6 focus power brand instead of 7.
  • The mgmt said that in mosquito repellents, liquid contribution in FY14 was 25%. It is targeting a further increase in liquid revenues to 40% of mosquito repellent sales during the next 3 - 5 years. The company will be launching an innovative liquid mosquito repellent machine to compete with the advanced machines launched by its peers.
  • During the quarter, non-south sales increased to 60% of total sales from 58% in the previous corresponding period. The company plans to increase its non-south sales to 70-75% of total sales during the next five years.
  • The company plans to focus on urban markets and non-south geographies to drive revenues.
  • The management expects some softening on the input cost front due to INR appreciation.
  • During Q1 FY15, the company is re-launching Henko nationally, backed by an aggressive marketing campaign. The company plans to invest aggressively in Margo Exo and Ujala at a national level to scale-up revenues.
  • The mgmt expects 20% - 25% revenue growth and EBITDA margin of 14% for FY15.
  • The company's board has approved ESOP scheme for CEO and senior management. While no specific details were divulged, the mgmt highlighted that ESOPs will lead to a 3% dilution over a 3-year period. The company has also extended CEO's Mr. Raghunandan tenure from FY15 end to FY17 end.

(Prash) #7

Jyothy labs Q4 PAT contains other income of 15 cr. This other income were present in previous quarters also. From 12-13 AR Notes other income seems to have come from interest income on loans to subsidiaries. I have two doubts

1). Why this other income is still present as merger with henkel happened in 2013 march.

2). In 2014 q3 they raised some money and paid back the debt. If there is no debt in henkels books there is no question of giving loan to henkel and earn interest on that loan.

In some interview Mr Ullas Kamat said that the company has around 175 lacs in bank as war chest currently.

Interest on 175 lac @ 9% for a quarter comes around 4 crs … Still not sure how they have 15 cr as other income this quarter…

Kindly correct me if I am wrong…

Br,

Prasobh


(Hemant V Bhatia) #8

Highlights of the meet by Capital Mkt:

The consolidated net sales have gone up by 16% to Rs 385.5 crore while net profit inclined by 52% to Rs 42.4 crore. The rise in revenue was driven by an 8% volume growth and an 8% price-led growthThe operating margin declined by 89 bps to 13.5% due to increase in raw material cost. The higher raw material cost was on account of inferior mix, arising from lower 12% growth in Ujala fabric whitener

The fabric care segment grew by 19% to Rs 177.05 crore. Ujala Fabric whitener grew by 12% on a high base of the last year with a volume growth of 6%. The mgmt expects Ujala Fabric whitener to achieve better growth rates in the coming quarters.

The company has re-launched Henko Matic in the premium to mild-premium detergent segment with a new proposition. The brand was promoted through a digital campaign, social media and on ground tie-ups. Henko Matic has been launched with the aim of grabbing a 20% share in the matic segment and a 10% share in the super premium detergent segment in the coming years. The brand has higher margins compared with the other brands in the portfolio and with increased sales of the brand the detergent segment's margins will improve over the period of time

The dishwashing segment revenues grew by 24% to Rs 101.06 crore.. Pril was re-launched in August 2014 with a new formulation. The company has also launched 225ml bottles and pouches to attract first time users to the brand and the liquid format of the dishwashing detergent.

The mosquito repellent segment grew by 19% to Rs 43.84 crore. The strong growth was largely driven by strong sales in the liquid segment which now accounts for 25% of the total mosquito repellent sales. In the quarter, the company launched a low smoke coil in the domestic market. Going ahead, it is planning to launch a new mix of liquid vaporizers in Q3 FY15. The liquid vaporizer sales are expected to grow strongly in the coming quarters

The personal care segment's revenues declined by 4% to Rs 46.67 crore. This was mainly on account of a decline in the sales of the Margo soap brand due to a drop in promotions. The mgmt expects Margo's sales to revive in the coming quarters.Margo face wash will be launched in the domestic market in September 2014.

The raw material cost inflation stood at 8%, which was mitigated by around 8% price increase during quarter. Inflation was high in palm fatty acid prices and hence the company dropped the promotions for Margo soaps during the quarter. The mgmt said that it does not expect any significant increase in the palm oil prices in the coming quarters.

The management is confident of sustaining the strong revenue growth momentum in the coming quarters on the back of innovations, increased distribution reach and adequate promotional activities. The OPM is expected to remain at 13.5-14% in the near future. The gross margins are expected to improve going forward, led by a revival in growth of high margin products like Ujala fabric whitener.ASP for the FY15 will be around 12-13%.The debt at consolidated level is around Rs 400 crore and cash is Rs 110 crore.The mgmt expects laundry business to be EBIDTA positive by March 2015.


(Varadharajan Ragunathan) #9

I spoke to a friend in FMCG in the fabric care business and his view was that Jyoti’s brands still do not have even a fraction of the strength of ariel/surf and unfortunately their reach is restricted to urban areas where organized retail is gaining significance. As a result, their channel margins are getting squeezed or the company doing 1+ 1/product bundling campaigns ( I checked a shelf and Pril comes free with henko etc.)

It seems like gross margins IMHO might not improve in a hurry.

As always, my views and they could be wrong


(Hemant V Bhatia) #10

Highlights of the meet by Capital MKT:

  • The consolidated net sales have gone up by 16% to Rs 367.9 crore driven by 9% volume growth and 7% price growth. The net profit inclined by 54% to Rs 25.1 crore.The operating margin declined by 302bps to 9.1% due to higher raw material cost and rise in ASP spend.The mgmt said the gross margin for H2 FY15 will better than H1 with drop in key input prices including palm oil and packaging cost. Future added that the improvement in gross margins is likely to directly flow in the OPM, resulting in a better OPM in H2 FY2015
  • The fabric care segment grew by 15% Ujala fabric whitener registered a single digit growth in comparison with the double digit growth in the previous quarter. The company has indicated of achieving double digit growth with implementation of new plans towards the brand in the coming quarters.Henko was re-launched in the premium to mild premium detergent segment in India with a new proposition which performed extremely well for the company. Henko Stain Champion and Henko Matic registered a growth of 39% each during the quarter. The brand is now available in all towns with over one lakh population. The company expects a strong growth momentum in brand to sustain in the coming quarters.
  • Mosquito repellant segment registered a 5% growth. The lower sales can be attributed to extended summers and below normal rainfall especially in northern India. The sales of Maxo coil stood flat, while liquids grew by 24% for the company. The innovation in liquid vaporizer with all new mix is likely to be in Q3.
  • The dishwashing segment grew by 17%. Exo dishwashing bar and Pril liquid grew by 17% each during the quarter. The mgmt expects 17-18% revenue growth to sustain in the coming quarters. The mgmt said that going ahead the key growth drivers would be square bars, which contributes just 30% of the current brand contribution for the company. The square bars would largely be sold in tier II and III towns, where the format has good acceptance.
  • The personal segment registered a strong growth of 40% with Margo soaps growing 48% driven by 37% volume growth. The mgmt expects Margo to grow above 20% in the near to medium term.
  • During the quarter, the company granted options for senior management under the employee stock option scheme (ESOS). The expenses pertaining to ESOS stood at Rs 6 crore during the quarter. For FY15 the expenses under ESOS would be Rs 30 crore, which will reduce in the subsequent years.A&P spends would sustain at around 12% for FY15 and in the range of 11.5-12% in FY16.

(ranvir dehal) #11

With strong growth in Henko, Exo and pril, the company is indeed showing a lot of promise. The market for these products is huge( although very competitive). If jyothy ends up capturing even 10 pc of the market with henko over the next 5-7 yrs, it will lead to huge gains for the stake holders. JLL already enjoying descent market positions in dish washing( with exo and pril duo) and mosquito repellants( with maxo).

Margo revival is another positive.

Disclosure…heavily invested in JLL.


(Varadharajan Ragunathan) #12

My sense of jyothy is that the management are very poor capital allocators - RoE is consistently below cost and on top of it, they award themselves options and dilute shareholders further.

If you talk to anyone in the FMCG business, they would tell you that henko, pril are all push driven brands (run on discounts and offers) and have no brand pull unlike an ariel, surf or a vim.

Seems to be a case of management chasing unprofitable growth with no fundamental value getting created - looking at cash flows .

Views always welcome


(ranvir dehal) #13

Ujala and Exo are not push driven at all. In fact they have descent brand eqiuty specially in rural and tier-3 & 4 cities. Pril too is not in a bad situation.

Henko certainly is push driven. And that precisely is the challenge before the management. I ve always been skeptical wrt Henko. But growth shown by Henko in last 2 qtrs is comforting. Company has thrown some weight behind Henko with extensive advertisements (with Madhuri Dixit as brand ambassador) and new pink coloured formulation. I ve personally tried it…its quite good…but more importantly it is far better thanerstwhile Henko.

As far as capital allocation is concerned…it is not bad at all considering the company is in the process of building its brands and the company has been doing this for the last 2-3 yrs. They have to spend a lot on advertisement. Its a part of the game.

Moreover the speed with which the company turned around Henkel, cut costs, laid offunnecessary manpower, aquired Henkel’s DEBT…which in turn saved company a lot of taxes is truly commendable.

Well those are my views. Views from fellow members arecordiallyinvited


(ranvir dehal) #14

Just read this friends… http://forbesindia.com/article/big-bet/how-jyothy-laboratories-silenced-sceptics/37536/3 anybody remotely tracking JLL would turn super bullish after reading this…it happened to me atleast!!!


(ranvir dehal) #15

After march 2016…Henkel AG( German FMCG giant) is expected to buy 25 stake in the company…that sure would help JLL pay off all its debt and still have a lot of cash for further expansion…Moreover then there is the possibility of Henkel AG introducing its products in India. That should act as nitro boosters for JLL and its stock price.

Views from fellow members are invited!!!


(Rajesh Kumar) #16

S Raghunandan is heading Jyothy. He is a very respected marketing man. He is credited with the brand creation of Paras Pharma. The way he has turned around Jyothy in last 2 years is commendable. Personally I liked the placement/packing of Henko in departmental stores.


(Varadharajan Ragunathan) #17

Thanks for these - let me study all annual reports, look at trends especially cash flows and get back.


(Varadharajan Ragunathan) #18

Sorry folks I completely disagree on this

I went through the annual reports in detail and I think Jyothy is a ticking time bomb waiting to explode in FY 16. check page 76 of the AR 2014. The company has Rs. 515 Cr. worth of NCD’s that have to be redeemed in FY 2016

Using an old accounting trick, the company has cleverly masked interest payments by issuing zero coupon convertible debentures and routing the premium that it has to pay at the time of redemption into BS (offsetting reserves).

and I find this claim of being debt free atrocious

If I borrowed Rs. 50 lakh against my Rs. 1 Cr. house and said I will give the counterparty my house at the end of 5 years, could I claim that I am debt free because I have no interest payments technically ?

Run the numbers and you will see what I am talking about - the company makes Rs. 165 Cr. of OCF and even if I assume it will double by FY 16 (looks tough with falling margins, increasing ad costs), how will they pay Rs. 600 Cr. in a bullet in FY 2016 ?

The alternative may to roll this debt and/or issue fresh shares both of which are not good from a shareholder stand point.

This looks eerily similar to the FCCB debacle that happened during the go-go years (subex, suzlon etc.) where companies borrowed merrily thinking they would get converted into

For the record, the company is not creating an a reserve either for redemption every year.

This could be a great short candidate in early FY 2016 if the markets are bad and they can’t raise money. If god forbid, we have a lehman type macro crash, this could go quite some way down - there could be a massive liquidity squeeze.

Think of it, if you take out Rs. 60 Cr. of interest out (notional), shareholders are not so rich off after all. remember it’s a 15% discount to others not a 40-50% discount - that’s what it should trade it given the money that’s going to go out.

Counter views always welcome

S Raghunandan is heading Jyothy. He is a very respected marketing man. He is credited with the brand creation of Paras Pharma. The way he has turned around Jyothy in last 2 years is commendable. Personally I liked the placement/packing of Henko in departmental stores.


(Varadharajan Ragunathan) #19

Oh and I forgot to mention - I always look at cash return on invested capital - CROIC. In this case, it is EBITDA / (equity + long term debt) = / (720 Cr. NW + Rs. 500 Cr. approx of debt) - approx 15% pre-tax - just about cost of equity.

I would’nt be comfortable with anything less than 25-30% given the cash flow that is required.

Succinctly put, the economics of the business in real life are not as good as accounting ratios make it out to be (because of a loop hole in accounting).


(bomi karkaria) #20

Great find, Vardharajan, in spotting that dodgy accounting. I wonder why the management is going overboard in giving themselves liberal stock options, when they must be fully aware that come 2016, the bottom is going to fall out.