STOCK IDEA
Jyothy Laboratories
Recommendation: Buy
Price target: Rs254
Current market price: Rs180
Key points
Chip off the old block: With the successful integration of Henkel, which it had acquired in early FY2012, and the induction of a new management team led by a professional chief executive office (CEO; S Raghunanadan, who successfully built brands like Moov among other notable achievements) Jyothy Laboratories Ltd (JLL) is transforming itself from a one-brand wonder to an aggressive fast moving consumer goods (FMCG) player focused on gaining market share in a wide range of categories (including premium detergents, household insecticides, dishwash and deodorants). The new team has taken bold decisions including the restructuring of the distribution network and the margins for the channel partners, the implementation of technological solutions to modernise the supply chain and the adoption of better manufacturing practices.
Set to grow exponentially: Given the company's highly focused strategy to leverage on its strong brand portfolio, the management is confident of surpassing the industry growth rates and gaining significant market share in categories like detergents (Henko and Ujala) dishwash (Exo and Pril), household insecticides (Maxo coils and liquids) and personal care (Fa deodorants and talc; and Margo soap). We estimate JLL's top line would grow at a compounded annual growth rate (CAGR) of close to 25% over the next three years (FY2013-16). What's more, the strong revenue growth is likely to be accompanied by a considerable improvement in the operating profit margin (OPM; resulting from lower distribution margins and efficiency gains; margin improvement of over 300 basis points expected over the next three years) and a declining interest burden (through the repayment of the debt taken to acquire Henkel using internal accruals). This would result in an exponential growth in its earnings.
Focus on improving balance sheet: JLL has taken steps to reduce its working capital requirements by revamping its supply chain network. It also plans to reduce the debt on the consolidated books by improving its profitability and selling some of its non-core assets. The company targets to achieve a debt/equity ratio of 0.5x by FY2015 as against 0.9x at present. With an improvement in the margin, the return ratios of the company are expected to get back in double digits by FY2014 and cross 20% by FY2016.
Recommend Buy; price target of Rs254: For the company FY2013 was a year of integration and implementation of several initiatives that would reflect in its financial performance from FY2014. With a close to 25% growth in revenues and a potential for substantial improvement in the OPM, we expect JLL's consolidated bottom line to grow exponentially over the next three years. Hence, we are initiating coverage on the stock with a Buy recommendation. Our price target for the stock is Rs254 (we have valued the stock at a 25% discount to the average multiple of some of the large FMCG companies). Our price target is based on an investment horizon of 18 months. At the current market price the stock is trading at 21.7x FY2015E earnings per share (EPS) of Rs8.3 and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.8x
Jyothy Laboratories
Recommendation: Buy
Price target: Rs254
Current market price: Rs180
Key points
Chip off the old block: With the successful integration of Henkel, which it had acquired in early FY2012, and the induction of a new management team led by a professional chief executive office (CEO; S Raghunanadan, who successfully built brands like Moov among other notable achievements) Jyothy Laboratories Ltd (JLL) is transforming itself from a one-brand wonder to an aggressive fast moving consumer goods (FMCG) player focused on gaining market share in a wide range of categories (including premium detergents, household insecticides, dishwash and deodorants). The new team has taken bold decisions including the restructuring of the distribution network and the margins for the channel partners, the implementation of technological solutions to modernise the supply chain and the adoption of better manufacturing practices.
Set to grow exponentially: Given the company's highly focused strategy to leverage on its strong brand portfolio, the management is confident of surpassing the industry growth rates and gaining significant market share in categories like detergents (Henko and Ujala) dishwash (Exo and Pril), household insecticides (Maxo coils and liquids) and personal care (Fa deodorants and talc; and Margo soap). We estimate JLL's top line would grow at a compounded annual growth rate (CAGR) of close to 25% over the next three years (FY2013-16). What's more, the strong revenue growth is likely to be accompanied by a considerable improvement in the operating profit margin (OPM; resulting from lower distribution margins and efficiency gains; margin improvement of over 300 basis points expected over the next three years) and a declining interest burden (through the repayment of the debt taken to acquire Henkel using internal accruals). This would result in an exponential growth in its earnings.
Focus on improving balance sheet: JLL has taken steps to reduce its working capital requirements by revamping its supply chain network. It also plans to reduce the debt on the consolidated books by improving its profitability and selling some of its non-core assets. The company targets to achieve a debt/equity ratio of 0.5x by FY2015 as against 0.9x at present. With an improvement in the margin, the return ratios of the company are expected to get back in double digits by FY2014 and cross 20% by FY2016.
Recommend Buy; price target of Rs254: For the company FY2013 was a year of integration and implementation of several initiatives that would reflect in its financial performance from FY2014. With a close to 25% growth in revenues and a potential for substantial improvement in the OPM, we expect JLL's consolidated bottom line to grow exponentially over the next three years. Hence, we are initiating coverage on the stock with a Buy recommendation. Our price target for the stock is Rs254 (we have valued the stock at a 25% discount to the average multiple of some of the large FMCG companies). Our price target is based on an investment horizon of 18 months. At the current market price the stock is trading at 21.7x FY2015E earnings per share (EPS) of Rs8.3 and enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 12.8x
