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Analysis: Inorganic push for Jyothy Labs

Expects to grow consolidated sales by 20%, EBITDA to be about 17%

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Jyothy Laboratories (Jyothy) reported better than anticipated results for the December quarter. The company expects to grow its consolidated sales by 20% and EBITDA margin to be about 17% in FY14 on the back of strong synergies from the Henkel integration as well as higher traction in the homecare business.

The Jyothy scrip has corrected by over 20% in the past four months and has witnessed slight uptick in the last two trading sessions where it grew by 1.5% to Rs 145 a piece. This rise came against a near 1% fall in the BSE FMCG and Sensex over the past two days.

The scrip trades at relatively inexpensive valuations of 20 times FY14 estimated earnings. Consistent performance in the coming quarters will be the key driver of the Jyothy scrip in the medium term, believe analysts. Most analysts remain positive on the scrip and expect it to clock in 15-20% gains from current levels.

"We see signs of turnaround in the combined entity. Key focus areas are improving market position and driving growth of its seven key brands, enhancing margins through efficiencies in supply chain and manufacturing capabilities and making the distribution network stronger. Benefits of this clean-up process will likely be visible from April 13 onwards", analysts at Kotak Institutional Equities write in a post-results note on Jyothy.

Jyothy posted better than expected results for the December 2012 quarter, driven by robust volume growth and strong margin expansion. Its sales grew 22.5% to Rs 204 crore while net profit came in at 26 crore, down 10.3% over same quarter of previous fiscal. While topline was boosted by strong volume growth of 10% (due to a 31.4% growth of the soap and detergent segment), bottomline was hit due to swelling interest expenses.

Notably, this fall in net profit came in lower than street expectations. The company also beat the street expectations on EBITDA margin as this metric expanded by 73 basis points to 17.6%. Savings on employee costs (due to exit of 200 Henkel employees) and due to closure of its depots were the key factors behind margin expansion.

Lower (A&P) at 5.2% of sales versus management's annual guidance of 8% further fuelled the margin expansion. "We believe this low A&P spending is not sustainable and should be higher in coming quarters. We believe higher A&P as well as possible execution delays would limit the EBITDA margin to 15-15.5% for FY14-15 and might be revised upwards once the company consistently outperformed our EBITDA margin estimates", says Naveen Trivedi, FMCG analyst at Karvy Stock Broking.

Excluding the inter-segment sales of Rs 35 crore to Jyothy Consumer Products (JCPL) - formerly Henkel India, the sales growth was muted at about 1%. Rationalisation of distributors (company retained only distributors having atleast Rs 1.5 million monthly sales) was the main reason for subdued performance on topline front.

Jyothy also trimmed channel margins of stockists' and retailers which partly drove the realisations. As per the management, the distribution consolidation is over and the overall performance should improve from the March 2013 quarter.

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