Jyothy laboratories acquisition of henkel india


(Varadharajan Ragunathan) #21

Bomi - thanks - simple - I think given this convolution, no one is going to worry about it until late 2015 by which time the share price would have gone up significantly and options can be exercised.

I slept over the stock yesterday - I have a few other problems with the core business

)- dish washers is a category that is growing but not a category which is brand conscious for obvious reasons - dirty job, handled by the maid, no sense of emotional high etc. Infact, for a lot of modern retail it is a good category to squeeze in private brands - for eg., I buy stuff from reliance retail - pril costs Rs. 75-80 whereas a private label brand of reliance costs Rs. 50. I always buy the latter - in any case, the maid is doing the work and 50% difference is not worth the “brand”

-blue/whitener to me is a structurally challenged category as washing machine penetration increases for obvious reasons - you can’t add blue to the bunch of clothes going inside the machine together. Days of us taking pains to add blue, soak a white shirt are gone

-Margo, fa are good brands - but in niches. Henko is a good brand but driven primarily by push - go check out any retailer - henko is always a 1 + 1, 20% extra, bucket free extra - I always buy henko only for that

My sense is that the company is “pushing” products, sacrificing margins (see results over last 2-3 years) to show topline growth.

Unlike paras (where Mr. Raghunandan) came from, which had brands with high pricing power - for eg., moov, livon, these are also rans (Paras had an EBITDA margin of 22%) with a lot more competition.

Don’t get me wrong - this is not a bad business - this is an average business with a huge invisible rock around its neck (the debt) that the market thinks is a superstar business

.

That said, I am damn impressed with the auditors and investment bankers - this is the first time I have seen a zero coupon debenture trick without a provision for reserves.

Nice learning !


(ranvir dehal) #22

Thanks Ragunathan for your detailed work…

But I have a differing view.

The fact that JLL has piled on a debt of 600 odd crores is already well known. How else could a company of JLL size could have acquired Henkel??? Secondly if it were a normal loan with monthly/yearly repayments…JLL would have been unable to service it with its financial condition in FY11-12(ie when it acquired henkel).

Also acquiring Henkel is one thing…turning it around in the face of Surf, Aerial, Tide, Vim etc is another. This turnaround would have required still more funds which JLL did not have. Therefore JLL had no choice except to issue NCDs maturing FY 16.

Also, Ragunandan (the coo of JLL) and Mr. Ramachandran intend to offload 25% pc stake to Henkel AG after Mar 16 which should fetch them around 1250 cr( considering a marketcap of 5000 cr in Mar16, which is a conservative estimate considering present marketcap at 4000cr) Aso, by all estimates, Henkel AG would be more than happy to acquire this stake at premium valuations considering JLL did what they could not do in over a decade…ie to make their operations profitable.

At current run rate, if JLL reports a EPS of 12 in fy 16 with marketcap of say 5000cr @ a share price of around Rs 325…JLL would get Rs 1250 from Henkel AG and after dilution new EPS would be around Rs 9. Also after repaying a loan of say 700 cr…JLL would then have Rs 500 cr extra for further business expansion/ acquisitions.

Aso it is highly unlikely that JLL’s share price would fall signifigantly from current levels looking at its past 2 qtr results. Therefore raising 600-700 odd cr for repaying NCDs should not be a problem at all. Aso, with falling crude and other commodity prices…margins should only expand in future.

Issuing NCDs therefore in my opinion is far from being a time bomb…in fact it might turnout to be a masterstroke.


(ranvir dehal) #23

Also, this claim of being debt free( by Ullas Kamath) comes from the fact that Henkel AG is surely going to buy 25 pc stake in the company come Mar 16. In a way, JLL would never have to pay interest on its debt. They have earned this luxury by turning around Henkel’s sick business. And I think they deserve this. Plus they will get a global partner, global distribution reach etc post this arrangement.

Views from fellow members are invited.


(Varadharajan Ragunathan) #24

Ranvir

On what basis are you saying it’s turning around - sure sales is growing but hte management promised 14 % EBITDA in 2011 post acquisition and they are not there yet.

I was a M & A banker for a long time - I don’t see a reason why a MNC would buy a minority stake and not have the luxury of consolidating its financials. The reason why a 25 % call exists is quite the opposite - company law needs you to have 26 % to veto decisions - in a lot of deals like this, this is a tag to ensure that in case of something going terribly wrong, say a fraud etc. the MNC buys 26 % helps dissolve the company through a veto.

For the record, please let me know a single MNC that has bought a 26 % stake in a flourishing business in the last decade - they either buy out or do a JV to have significant operating influence. For a company like henkel, the issues of being a minority shareholder are tremendous - inability to consolidate income/profits, inability to create another subsidiary without the consent of its partner (remember the hero and honda story) and potential susceptibility to governance issues that can impact their global mcap.

If your thesis hinges on henkel would buy JLL’s stake, there is a significant risk to it.

As of now, I do not see a clear turnaround as yet - cash flows are muted - debt is 4 x EBITDA and margins are yet to improve after nearly 3.5 years and debt has still not been paid down by even 10-20% - it has been only restructured into a bullet.

What do you have in terms of data points to suggest a turnaround - viz., a profitable growth ?


(ranvir dehal) #25

OPM for JLL in year ending mar 14 was 13.26% against 12.15% in Mar 13. NPM in Mar14 was 8.06% against 4.12% in Mar 13.

Avg OPM and NPM for last 2 qtrs was 12% Aprox and 10 % Aprox.

Compare this to HUL…OPM and NPM for Mar 13 was 15.5 and 14.3%. OPM and NPM for Mar 14 was 15.9 and 13.5%.

With commodity prices crashing recently, JLL management has given a guidance for 13-14% OPM in the next two quarters.

That is not too bad considering JLL is in a nascent stage as compared to HUL. Also, with Henko, Henkomatic, Margo and Margo-face wash showing a growth of around 40 % in last qtr( although on a small base) clearly shows a turnaround in the making.

Even if we assume that Henkel is not going to buy a 26% stake in JLL, Doing a 500 cr QIP should not be a difficult task for JLL( against a marketcap of say 5000 cr).

And to be sure, management is going that way considering they gave away dividends of Rs3/share and Rs2.5/share in Mar14 and Mar13.

Thanks,

Ranvir


(Bhaumik) #26

Hi Ranvir,

Firstly…JYL has had quite a volatile history of margins…in fact to refer to the numbers quoted by you, it was 12% in FY13, rose to 13%+ and then back to 12% in H1FY15…also NPM is not strictly comparable as it is the accounting ‘acumen’ which results in interest costs virtually out of the books (NCD)…

On Henko, it is still more of primary sales and yet to be proven if the product has been well accepted by consumers…too early to conclude that…

the problem with these guys is that they are in such crowded categories that any benefit on RM would go into higher promotions and will not flow to the bottomline (one has to then see how much these prmotions really help in generating higher vols as virtually eveyone else in the market would also be doing the same)…While rising RMs do have an impact on GMs due to lack of sufficient pricing power…

dividend is 1% odd yield…hardly anything to be optimistic about in my view…

I would say its a very risky trade!


(ranvir dehal) #27

JLL is still in digesting Henkel India. It takes time. In the meantime, there are a lot of positive indicators…Growth rates for the following brands in Fy 13-14 over Fy12-13 are as follows…

Henko- 17%

Exo-29%

Maxo liquid-95%

Maxo-28%

Ujala already has 71% market share in the blue whitener catageory

All this in an year which was bad for the FMCG industry. And these growth rates have only accelrated in the past 2 qtrs( except for Maxo due to delayed monsoon)

According to me…this cloud has a silver lining too.

Regards

Ranvir


(ranvir dehal) #28

And I forgot to mention… growth rates for Pril was 26 % and for Margo was 28%


(bomi karkaria) #29

In the FMCG space, comparing Y-o-Y volume growth rates of a company’s brands, means nothing. You need to compare a brands growth rate with the growth rate of the entire market of that category. To illustrate, if the carbonated soft drinks market grew by 20% in India, then a growth rate of less than 20% of a particular brand, means it has lost market share.

Also one needs to eliminate the freebies in calculating growth rate. So if Henko is being pushed by giving a bottle of Pril free, then that freebie needs to be excluded in calculating Pril’s growth rate. Unfortunately, such detailed data will never be available in the public domain. So a rough calculation of real growth of Pril is 26% less Henko’s growth rate of 17%; i.e. 9%


(Varadharajan Ragunathan) #30

Ranvir

I checked with someone in FMCG trade - a lot of these volumes are because of promotional offers to trade and to customers ( viz., 10 + 1, 1 + 1) and volume growth has not translated into value growth or margin growth - the categories in which these are present in are already crowded and have huge market leaders - for eg., in the dishwashing shelf, vim is kept at eye level and maxo is kept on the bottom most shelf and the middle rows populated by private labels. And none of their products are close to the market leaders in terms of pricing.

If volumes are growing so well and pricing is improving, how come even gross margins are not improving ? How come no debt has been repaid so far in the last three years ? FMCG is known to be a prodigious free cash flow generator - HUL has a 100 % + RoE and negative working captial.

One data point is the working capital cycle for henko - it’s amongst the bottom 25 % in this industry

The data points together are not building a credible hypothesis that the company is gaining marketshare, improving profitability and can pay down debt.

Rather than view it from the company’s trumpet, like Bomi said, look at it relative to the market and whether they are capable of paying down Rs. 600 Cr. of debt in two years.

Remember what warren buffet said " buy something that will continue working even if the market shuts down for five years.’ In this case if they can’t raise QIP or re-finance debt, the story could become very tough.


(Varadharajan Ragunathan) #31

Ranvir

I checked with someone in FMCG trade - a lot of these volumes are because of promotional offers to trade and to customers ( viz., 10 + 1, 1 + 1) and volume growth has not translated into value growth or margin growth - the categories in which these are present in are already crowded and have huge market leaders - for eg., in the dishwashing shelf, vim is kept at eye level and maxo is kept on the bottom most shelf and the middle rows populated by private labels. And none of their products are close to the market leaders in terms of pricing.

If volumes are growing so well and pricing is improving, how come even gross margins are not improving ? How come no debt has been repaid so far in the last three years ? FMCG is known to be a prodigious free cash flow generator - HUL has a 100 % + RoE and negative working captial.

One data point is the working capital cycle for henko - it’s amongst the bottom 25 % in this industry

The data points together are not building a credible hypothesis that the company is gaining marketshare, improving profitability and can pay down debt.

Rather than view it from the company’s trumpet, like Bomi said, look at it relative to the market and whether they are capable of paying down Rs. 600 Cr. of debt in two years.

Remember what warren buffet said " buy something that will continue working even if the market shuts down for five years.’ In this case if they can’t raise QIP or re-finance debt, the story could become very tough.


(ranvir dehal) #32

Well…by now u can make out that i am a strong JLL Turnaround believer. Few points from recently concluded con call are as follows…

1). Due to weakness in RM prices, gross margins will start improving in DEC qtr and will fully improve in MAR qtr. Due to raw materials forward booking.

2). Advertisement spend up by 45 % …due to henko relaunch.

3). Drop in EBITDA Due to higher advertising and promotion spending.

4). Maxo liquid growth at 24 pc.

5). Total sales up by 16.2 pc…9 pc by volume and 7 pc by price.

6). Gross margins at 48 pc…1 pc drop…should more than recover in next 2 qtrs.

7). Margo growth at 48 pc…37 pc by volume…11 pc by price.

8). Palm oil prices down by 35 pc…should improve gross margins of margo going forward.

I hope this answers some of your queries. …although not completely.

Another point i want to make is that JLL be looked at as a turnaround story and so its comparison with well established and smooth running FMCG Businesses may not be fair at this stage. One or two years down the line…certainly yes!!!

Views invited,

Ranvir Dehal


(ranvir dehal) #33

And remember. …pril, henko, margo, fa, mr.white and chek together were making losses of aprox 40 cr per year not too long ago…and they made losses consicutively for over a decade.

So…their performance under JLL is not too bad afterall…and it is only improving by the day.


(Bhaumik) #34

Growth rates are a function of base effect too…so obviously if you had a bad base, growth numbers will look amplified to that extent - case in point Henko, Maxo…also maxo liquid growth is coming on a low base as jyl hardly has presence there

also one needs to check the quality of growth and how sustainable this is…if its coming on the back of promotions and only at the primarily level, its of no use…and over time this will correct and show in lower growth numbers…


(Prash) #35

Hi ,

I was just wondering how the brand building in FMCG works ?

A lot being said here about push based revenue increase …

1). An FMCG firm who wants to increase the brand equity of its products will definitely increase ad spent. Is there any other way to launch a product to create buying awareness ?

2). Is it too early to judge that whether jyothy’s revenue are based on push based ? I read somewhere that Henkel was relaunched only few months back.

3). Is this few months enough for building a brand imprinting on ppls minds ?

I secondVaradharajan Ragunathanon the placement of Jyothy products in super markets… I could see a below premium placement for Henkel in a local super market from where I usually buy.

I am also not happy about the accounting gimmick used by promoters to mask interest payments…

Disclaimer : Jyothy is a 3 bagger for me at current CMP.


(ranvir dehal) #36

Jyothy labs has been rising continuously over the last few days…looks like sharp decline in raw material prices (crude oil derivatives) is getting factored in. Also strong buying in the run up to quarterly results points towards more than descent q3 results.


(Hemant V Bhatia) #37

Highlights of the meet by Capital Mkt;

  • The consolidated net sales have gone up by 15% to Rs 360.5 crore driven by 10% volume growth and 4% price growth. The net profit inclined by 17% to Rs 26.4crore.Gross profit margin improved in Q3 on the back of lower prices of inputs including palm oil and crude derivatives. But the operating profit margin declined affected by higher advertisement spending and employee cost.
  • The employee cost included a one-off expense of Rs11.8 crore on account of employee stock options. Excluding the one-off item the consolidated OPM remains flat at 13.5%.Ujala fabric whitener maintained its single-digit revenue growth, with a volume growth of 1% during the quarter. The company has planned new media activity for Q4 and also made comprehensive plans to achieve a strong double-digit growth in FY16. The company is planning to launch the Stiff & Shine brand, which is performing extremely well in Kerala, in one more south Indian market.The company will invest more on Ujala in coming quarters.
  • The revenues of Maxo mosquito repellant saw a growth of 48% in Q3. Maxo coil and Maxo liquids grew in strong double digits during the quarter. It is likely to come out with an innovative liquid vaporizer with an all new mix in Q1 FY16. It is even planning to launch its own version of fast card to improve its product portfolio.
  • The dishwashing segment grew by 14%. The growth was marginally lower than 17% in Q2 FY15 due to a high base of Q3 FY14 when the segment had registered a strong performance. Exo dishwashing bar and Pril liquid grew by 13% and 19% respectively during the quarter. The mgmt expects the segment to sustain a 17-18% revenue growth in the coming years, driven by over 20% growth in Pril liquid wash.
  • The mgmt said that it will re-launch Exo in Q1 FY16.
  • Henko was re-launched in the premium to mild-premium detergent segment in India with a new proposition and the brand performed extremely well for the company. The Henko portfolio of detergents registered a revenue growth of 29%. The brand was well supported by higher media spending.
  • Margo volume has declined by 3% in the quarter. The company will launch new communication and new strategy in coming quarter.The laundry business revenues grew by 8% to Rs10.6 crore while the losses of the business at the profit before interest and tax level were down by 15%.
  • The mgmt said that fall in raw material cost will help the company to see improvement in gross margin by 400 bps on YoY basis in Q4, out of which ti will retain 50% and 50% of it will be spend on advertisement and consumer promotion.
  • The mgmt said that in the present economic scenario, there will be zero price growth for the FMCG industry.Co. will not take price hike or cut its product price as of now.FY16 will see more investment behind Ujala, Margo and dishwashing products, as it looks to have more growth opportunities.The company will spend 12.5-13% of total sales of ASP for FY16.Tax rate till 2017 will be at MAT.
  • The mgmt expects to gain market-share in each of its category.13 â 14% of EBIDTA margin is sustainable as per mgmt.

(ranvir dehal) #38

Thanks Hemant,

I would say a descent set of results. Key positives include-

(a) 48% growth in MAXO

(b) 29% growth in HENKO ( This is a super positive sign although on a small base)

© Descent growth( 19% and 13%) in PRIL and EXO

In my view…there is NO reason to sell this stock…although valuations don’t warrant a buy either. If if falls…accumulation at lower levels can be considered.


(ranvir dehal) #39

Another thing which in my view requires great attention is the fact that CASH PROFIT for the quarter was 46 cr vs 28 cr in dec 13----up by 62 cr. Also for 9 months ending dec 15 CASH PROFIT was 94 cr vs 60 cr for 9 months ending dec 13-----up by 57 %.

This to me explains the rally in the stock price. Also, if looked at deeply may even justify a buy at current levels!!!

Views Invited


(ranvir dehal) #40

Small correction…It is growth of 62 % instead of 62 cr.

Sorry!!!