Jyothy, Henkel to merge finally

Fast-moving consumer goods firm Jyothy Laboratories Ltd on Friday said its board had approved a proposal for merger of Henkel India Ltd, the company it acquired last year, with itself.

Henkel shareholders will get one share of Jyothy for every eight shares held by them. But this will subsequently improve to one share for every four Jyothy shares following a bonus issue in July, said Ulhas Kamath, joint managing director of Jyothy.

Sector analysts are viewing the merger as a logical step following the acquisition of Henkel in 2011. Jyothy had acquired nearly 51 per cent in the loss-making company for a consideration of Rs 142.9 crore. Since then, it has increased its stake in Henkel to 83.66 per cent, while initiating an integration exercise across manufacturing, distribution and sales.

“Full benefits of the synergy, however, will be visible post the merger,” said Abneesh Roy, associate director, research at Edelweiss Capital, a financial services company.

The merger is likely to be completed in six to eight months from now till which time the financial results of the two companies will be reported separately.

The combined entity, under the leadership of the newly appointed chief executive officer, S Raghunandan, has an aggressive plan of action. This includes recruiting a fresh field force of 200 sales persons, focus on south and east-based stockists and distributors to drive productivity, moving to long-term brand-building from the current model of sales promotions and offers and increasing retail prices across products.

The company has already taken up Henkel product prices by about eight per cent in the financial year ended March 31 even as the price of Jyothy products was increased by about five per cent, Jyothy’s Kamath said.

Analysts say the key challenge after the merger will be to maintain the combined entity's pace of growth even as the management looks to bring down debt levels. Currently, consolidated debt on Jyothy's books is Rs 565 crore, whose rate of interest is 11 per cent per annum.

Interest outgo for the company works out to about Rs 62 crore, which Kamath said would be the immediate priority for it."At this stage, I am not worried about the overall debt because I have a period of five years to pay that off. The immediate challenge is to make the interest payment on the debt."

But Jyothy will also have to stave off competition in its areas of operation, chiefly detergents, where it has rivals such as Hindustan Unilever Ltd and Procter and Gamble to contend with. While Jyothy has indicated that it will increase the spotlight on Henkel brands taking them national even as its Ujala brand of detergents powders will be positioned as regional products, analysts say the way ahead may not be easy.

The stock of Jyothy was down 0.81 per cent on the BSE on Friday to close trade at Rs 234.10. Its intra-day high was Rs 244.90, while the low was Rs 227.55.