For 4QY2016, Jyothy Laboratories (JLL) reported a top-line growth of 11.1% yoy
to Rs445cr. On account of lower raw material and employee expenses as a
percentage of sales, the EBITDA margin expanded by 431bp yoy to 14.1%.
Interest expenses declined by 83.7% yoy to Rs1cr while the tax rate was higher at
35% vs 11.4% in 4QFY2015. On account of good top-line growth and higher
operating profitability, the net profit grew by 32.0% yoy to Rs36cr.
Continued focus on power brands and potential acquisitions to drive growth: JLL
has a strong product portfolio post the Henkel acquisition with key brands like
Henko, Margo and Pril coming under its portfolio in addition to its own successful
brands like Ujala, Exo and Maxo. These power brands have been the driving
factor for the company’s growth. The company has relaunched some products
and introduced newer products within these brands which has yielded positive
results. Going forward, the company has guided for revenue target of Rs5,000cr
by FY2020 and it is open to acquisitions in order to meet the target.
Henkel may potentially re-rate the stock: Effective April 2016, Henkel has an
option to purchase 26% stake in JLL (the option is valid to be exercised before 31st
March 2017). The promoters of JLL prefer the stake sale to materialize at a
mutually agreeable valuation. We believe Henkel will likely choose to exercise the
option, given the prospects of the Indian growth story. Our belief draws its basis
from the fact that Henkel’s agreement with Asian Paints for tapping the latter’s
distribution channel for promoting its consumer adhesives business (“Loctite”) in India is
some indication of Henkel’s faith in the India growth story. We believe that JLL would
then be able to fall back on Henkel to launch new products in the Indian market.
Outlook and valuation: We have switched over from valuing the company on
standalone numbers to consolidated numbers. The CEO, Mr Raghunandan is
stepping down from the leadership post but will make himself available for the
company to figure out big-ticket acquisitions and actively participate in strategic
planning. He will be replaced by Mr Rajnikant Sabnavis who was previously in
charge of sales & marketing in the company and has valuable industry experience
with HUL. The company has laid out an aggressive revenue target of Rs5,000cr by
FY2020 which would be a monitorable as the company has indicated at scouting
for suitable acquisitions. We expect the company’s revenue to grow at a CAGR of
11.6% over FY2016-18E to Rs2,052cr while net profit is expected to grow at a
CAGR of 7.0% over the same period to Rs181cr. At the current market price, the
stock trades at 29.2x its FY2018E earnings. We have a Neutral view on the stock.

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