Jyothy Labs: Uphill Task

Volatility in earnings to continue till integration of Henkel is complete.

Many years ago, catchy advertisements for fabric whitener by Jyothy Laboratories captured the imagination of consumers. But the product that made the company a category leader is now in long-term structural decline. In the fourth quarter, Ujala Supreme, flagship brand of Jyothy Labs, declined six per cent year-on-year. The overall performance of key brands has not been encouraging, which dragged down standalone sales by 17 per cent, to Rs 157 crore. Ebitda fell 50 per cent and profit after tax by 18 per cent.

As is evident, the company’s core brands have underperformed. Analysts believe dealers are switching to competing brands with higher margins. It’s from this point of view that the acquisition of Henkel makes immense sense for investors. After the acquisition of Henkel India, MAPE Securities believes that Jyothy’s dependence on its flagship product, Ujala Supreme, is expected to come down from 31.1 per cent in FY11 to 18.4 per cent in FY12.

However, the acquisition has not got a thumbs-up from the investment community, as there are doubts on the suitability. All these factors have resulted in the share price falling nearly 24 per cent this year, compared to the 10.2 per cent decline in the broader market Sensex and a gain of 4.8 per cent in the FMCG index. However, a segment of analysts believe the decline in volume growth at Maxo could moderate and the increased advertising spending may result in detergent sales gaining momentum in the current financial year. The merger with Henkel India will give Jyothy an entry to the personal care segment and immediate scale, compared to its current operations in the detergent segment.

However, Enam Securities believes the near-term volatility in earnings will continue as the management spends time in integrating the Henkel business, manage cost pressures and consolidates position in the laundry business.