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Institutional Equity Research

Jyothy Laboratories Ltd
FMCG | India JYL IN; JYOI.BO
September 17, 2013

Management Meet Note
Current price Target price Upside/(downside) Earning estimate Rs Rs %

BUY
154 178 16 Revised

Competition becomes aggressive in detergents
From our recent interaction with the management we gathered that a) the competition in detergents segment is getting tougher as HUL has introduced many promotional offers to squeeze out the smaller players b) input cost table has moved unfavourably for JLL due to 20% rise in crude oil prices and due to weakening rupee leading to erosion of 200bps at gross margin level. Heavy promotions in detergents leads to price deflation; top line growth in FMCG business to be at 25% in F14: We believe that HUL has introduced heavy promotional offers on its flagship detergent powder Surf offering Rin bar worth Rs10 free leading to price deflation in the category which had already seen pricing anniversary effect in 1QF14. Raw materials like LAB (up 6% YTD) and soda ash (up 16% YTD) are causing pressure on margin for the industry and more so on smaller players like JLL, Ghari or Nirma than the larger players like HUL or P&G as they have deep pockets. Detergents contribute to 25% (SSLe) to the top line for JLL and we believe that the growth will be muted in that category for JLL. However, we believe that due to repackaging in Ujala Supreme and new marketing campaigns in Margo, Pril, Fa, Mr. White and Maxo will hold up the sales. EBITDA estimates cut by 20% to account for input cost pressure and higher ad-spends: We are trimming the gross margin estimate for F14 from 49% to 47% as a) we reduced the gross margin for FMCG business (JLL standalone excl. laundry services) from 48% to 46% to account for 200bps erosion due to increase in input costs like LAB, soda ash and crude oil by 6%,16% and 20% YTD resp. b) we have increased ad-spends costs to Rs1.52bn (11.5% of sales) from Rs1.27bn (up 20%) as they spent Rs390mn in 1QF14 of which Rs270mn was regular TV ads (up by 22%) and the rest was one-time costs of new creative for Margo, Pril and Fa. In 3QF14, JLL is launching a revolutionary product in HI segment under Maxo which we believe will entail high marketing expenses.

Market data Mkt capitalisation Average daily vol 52-week H/L Shares O/S Free float Promotor holding Foreign holding Face value

Rs bn '000 Rs mn mn % % Rs

25.5 110.7 211 / 139 166.0 60.3 63.7 17.0 1.0

Price performance (%) Nifty (abs) Stock (abs) Relative to Index 1m 5.8 (6.4) (12.3) 3m (0.4) (19.2) (18.8) 6m (0.7) (7.6) (6.9) 1yr 3.9 (3.3) (7.2)

Performance 220 (Rs)
200 180 160 140

(%)

10

(10)

(30)

(50)

Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Jyothy Laboratories Rel. to BSETMCG

Source: Bloomberg, SSL

Financial summary
Y/E March (Rs mn) Sales Growth(%) EBIDTA margin (%) Net Profit Adj. net profit NPM(%) Growth(%) EPS - Reported (Rs) EPS - Core (Rs) P/E (x) Dividend yield (%) RoCE(%)
Sagarika Mukherjee +91 22 4227 3386 sagarika.mukherjee@sbicapsec.com

F 12 9,130 45.5 9.2 446 446 4.9 (35.2) 2.8 2.8 55.7 1.6 12.2 6.2

F 13 11,060 21.1 11.7 196 478 4.3 7.1 1.2 3.0 126.4 1.6 24.8 2.5

F 14e 13,243 19.7 12.0 757 757 5.7 58.6 4.6 4.6 33.8 1.6 34.4 10.9

F 15e 16,503 24.6 13.0 1,376 1,376 8.3 81.8 8.3 8.3 18.6 1.6 44.9 17.7

RoE(%) Source: Company, SSLe

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Outlook and Valuation: Based on the run-rate observed in June in which the full effect of new brand communications were evident.8/10. Accordingly we arrive at an EPS estimate of Rs4. sagarika. we believe that the strong gross margin expansion trend will be only a 1HF14 phenomenon.3.6/8. 2013 | 2 .com September 17. The improvement came about as JLL had rationalised the trade margins by 4% for most of the products and reduced warehouses from 64 to 30 over last one year. the stock is trading at 34x/19x our EPS estimate of Rs4.mukherjee@sbicapsec. However.2% was led by 686bps improvement in gross margin. At CMP of Rs154.Jyothy Laboratories Ltd . we have trimmed our EPS estimates down by 34% for F14 as a) we have reduced gross margin estimate for F14 49% to 47% b) increased ad-spends by 20% for the several product launches.5x F15e earnings estimate of Rs8. we have maintained our estimate for top line growth of 25% in F14 and F15.Competition becomes aggressive in detergents SBICAP Securities Ltd Cut in trade margin benefit will be in base by 3QF14: In 1QF14.3 earlier.3 for F14/F15 from Rs6. JLL reported an increase in EBITDA margin by 366bps to 15. We reduce our TP by 15% from Rs210 to Rs178 valuing it at 21.6/8. As this change was implemented fully by 3QF13.3 in –line with sector valuations.

mukherjee@sbicapsec.316 904 1.0 47.8 2.6 8.910 11.0 8.9 52.423 458 3.5 1.1 1.1 14.3 1.4 429.136.561 6.592 12.5 1.Core (Rs) 9.7 18.6 1.448 31 5.4 246.349 (666) (7.094 663 2.com September 17.RoE NPM(%) Leverage Asset turnover RoE(%) 4.7 58.8 1.4 1.683 49 4.7 35.693) 611 # Balance sheet Y/E March (Rs mn) Share Capital Reserves Total shareholder's Equity Minority interests Debt Deferred tax liability Total liabilities Tangible assets Intangible assets Fixed assets Investments Current Assets Inventories Receivables Loans & advances Cash Current Liabilities Payables Provisions Deferred tax asset Total Assets Source: SSLe Key ratios Y/E March F12 81 6.628 10.107) F13 196 224 682 (52) 145 (268) 631 204 (535) (3) 52 (5) (287) (682) (403) (107) 499 (694) (205) F14e 757 224 680 (52) 486 1.0 1.137 13.030 4.2 23.0 52.0 9.795 1.7 34.0 6.460 1.367.9 11.2 3.7) 590.2 1.8 8.6 0.8 sagarika.9 18. in goodwill Purchase of investments(net) Interest Received Others CFI Interest Paid Dividend Paid Proceeds from issue of shares Long term debt Debt to subsidiaries Inc.522 7.776) 271 F15e 1.220 6.7 47.4 695 7.685 2.165 13.6 0.609 (100) 52 (48) (680) (415) (1) (680) (1.2 1.391 869 2 11.366 34 3.8 11.185 (2.628 10.6 4.2 (148.3 583.3 227.1 1.5 52.060 21.366 2.5 199.297 11.528 11.Jyothy Laboratories Ltd .5 26.260 3.6 F15e 16.6 1.6 F13 161 6.0 34.5 739.856 9 11.304.8 F14e 34.8 955 8.344 869 11.2) 2.213 2.6 0.3 5.5 238.6 2.3 597.2 11.5 Du Pont Analysis .917 2.5 5.6 1.9 6.3 682.453 8.0 442.7 757 757 5.019 6.1 3.722 808 1.5 17.844 5.722 49 4.125 67 5.718 2. net profit NPM(%) Growth(%) EPS .2 4.341 4.0 20.616 12.0 739.4 11.2 20.2 224.376 1.100 45 1.8 196 478 4.7 7.6 0.8 29.503 24.044 6.8 107.3 224.130 45.7 1.4 107.0 146.3 1.4 8.636 F14e 161 7.7 446 446 4.3 1.3 7.905) (238) (403) 62 4.224 47 1.7 132.146 (100) 52 (48) (598) (415) (680) (1.2 3.643 161 11.828 370 11.068 967 903 730 3.6 8.3 680.9 1.8 224.8 F15e 44.1 61.488.763 1.0 146.5 F13 24.9 2.093) (574) 227 200 (7.5 26.0 F14e 13.4 24.2 52.5 12.7 2.697 31 4.289 841 9.093 10.050 49 1.8 2.7 11.698 2.Reported (Rs) EPS .659 15.3 43.0 34.6 4.837.953 (188) 4.4 28.5 0.9 33.975 F14e 161 6.9 100.381 49 5.996 F12 12.820 7.7 1.9 2.8 F13 11.536 9 11.6 14.198 1.7 47.636 2.3 384.243 19.6 1.3 81.5 3.069 7.216 47 1.1 1.5 5.0 2.376 8.8 1.0 22.273 7. in provisions CFF Net change in cash 446 247 238 (227) 265 700 1.0 146.945 7.816 869 1 11.628 10.6 5.4 1.176 9 11.9 35.975 3.2 32.Competition becomes aggressive in detergents SBICAP Securities Ltd Financials Income Statement (Y/E March ) Y/E March (Rs mn) F12 Total Revenues Growth rate (%) COGS Gross Profit Gross margin(%) Employee Costs Share of Net Sales(%) Ad-spends Share of Net Sales(%) Other manufacturing costs Share of Net Sales(%) Total expenses EBITDA EBITDA Margin(%) Growth rate(%) Depreciation Interest Expense Other income PBT Tax PAT Minority Interest Extraordinary items Net Profit Adj.427 15.6 17.6 12.652 1. 2013 | 3 .9 (35.088 1.996 3.1 5.572 31 4.3 8.2 0.917 RoCE(%) Inventory Days Receivables Days Loans and Advances Days Payable Days Provision Days Cash Conversion Cycle (Days) Valuation Ratios P/E (x) P/Sales(x) EV/EBITDA(x) P/BV(x) FCF yield (%) Dividend Yield(%) D/E(x) 55.7 54.367.2 86.376 224 598 (52) 206 2.188 807 1.4 19.3 # 0 # 0 0 # # 0 0 # 0 # 0 0 # # 0 # # 0 0 Cash Flow Statement (Y/E March) Y/E March (Rs mn) F12 Net Profit Depreciation/Amortisation Interest expense Interest income (Inc)/Dec in Wcap Others CFO Capex Inc.

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