Jyothy Labs – Can the company recreate the “Ujala” Magic across other portfolio brands? – Just Another Investor

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Founded in 1983, Jyothy Labs Limited (JLL) commenced its operations as a a single product (Ujala fabric whitener) manufacturer in a single district (Thrissur, Kerala). The company’s “Ujala” brand is an household name, on account of the company’s excellent marketing campaign in the late 90s and early 2000’s through “Aaya Naya Ujala” campaign. Over the decades, the company has diversified to become a multibrand and multi-product company with operations across the country. The company has a very strong presence especially in the state of Kerala and generates about 40% of its revenue from South India

Product Portfolio

The company added the “Henko”, “Pril” brands to its stable through acquisition of Henkel India in 2011. The acquisition was a major breakthrough, as the company was able to turnaround the acquired entity within 2 years. Further, it also aided company’s diversification in the detergent segment

Shareholding Pattern (As of March 2020)

Source: Company Filings

  • The Promoter shareholding has dropped from 67.1% in September 2019 to 62.9% in March 2020
  • The Promoters sold their shares during the period in-order to reduce pledge of shares
  • As of September 2019, the promoters had 25% shares pledged which reduced to 8.5% in March 2020
  • The mutual fund holding has increased substantially from 5.2% in March 2018 to 13.3% as of March 2020

Brand-wise Revenue

Source: Company Annual Report

  • Jyothy’s Ujala Supreme has enjoyed market leader position for three decades now and enjoys a market share of 80.6%* in FY 2018-19 in Fabric whitener category*
  • The company is the #2 band in the dishwash (bar and liquid) category*
  • It is the #2 brand in mosquito repellent coil category in volume terms*

*As per Company Disclosures

Segment-wise Revenue (As of Fiscal 2019)

Source: Company Filing

  • The company operates its “Laundry services” through its subsidiary – Jyothy Fabricare Services Private Limited

Financial Analysis

Continuous improvement in margins for the company though sales growth has been subdued

Source: Company Filings

  • The revenue growth for the company has been sluggish at around 6.5% CAGR during fiscal 2014 to 2019
  • However, the operating margin during the tenure improved from 11.6% to 15.5% thereby aiding profitability for the company
  • In fiscal 2015, the the advertisement and promotions expenses increased by 25% on-year for the company thereby impacting margins
  • As of fiscal 2019, the company spent 6.2% of its net sales on Ad & Promotion expenses
  • Compared to its industry peers, operating margin for the company as of fiscal 2019 is lower by ~400 bps (compared to average margins of Dabur India, Marico, HUL and Godrej Consumer)

Segment-wise Revenue Growth

Source: Company Filings

  • Across segments, the company has to compete with unorganised market which puts pressure on realisations and margins
  • Despite the leading market share in Fabric care whitener market (“Ujala Whiteneter”), the segment has grown at merely 5.6% CAGR
  • Dishwashing segment has been the fastest growing for the company driven by brands such as “Exo” and “Pril”
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Segment-wise Margin

Source: Company Filings

  • The margins for the company’s largest segment – fabric care increased by 300 bps for the company during fiscal 2016 to fiscal 2019 owing to soft raw material prices (crude-oil linked)
  • The company has also launched new innovative products such as Ujala Crisp & Shine, Henko Stain Care. Maxo Incense Sticks, etc. in-order to enrich its portfolio
  • Further, the rationalization of Ad spends post the initial push has also aided increase in margins for Personal care segment
  • The Household insecticides segment has been facing headwinds due to sale of illegal incense sticks
  • The laundry services segment continues to be a drag on company’s profitability

Company enjoys strong Balance Sheet

Source: Company Filings

  • The Gearing for the company has improved from 0.7X in March 2014 to 0.2X in March 2019
  • The company had raised debt in-order to fund the acquisition of Henkel India in 2011
  • The interest coverage ratio of the company has improved from 2.8X in March 2014 to 8.0X in March 2019

Trend in Return Ratios for the company

  • The dip in ROE in fiscal 2016 was on account of one-off tax related expense
  • The returns for the company have increased steadily during the last five years; however, compared to its industry peers the returns are substantially lower

Trend in Working Capital Ratios

Source: Company Filings

  • The company enjoys very comfortable working cycle with low receivable days and higher payable days
  • The same is in-line or better than many of its peers as the company operates on cash and carry model with majority of its partners
  • However, the current pandemic situation will lead to company having a re-look at its business model as wholesalers will seek credit period due to supply chain disruptions

Trend in Profitability

Source: Company Filings

  • The profitability for the company has increased consistently despite the subdued revenue growth
  • The laundry business of the company carried out through its subsidiary – Jyothy Fabricare Services – has been a drag on company’s profitability
  • Jyothy Fabricare Services reported a loss of INR 9.6 Crore in fiscal 2019; therefore, it is critical for the company to turnaround this business or else it will continue to erode company and shareholder value

Trend in EPS and Dividend per Share

Source: Company Filings

  • The company has been a consistent dividend-payer except for during fiscal 2018; the company conserved cash during fiscal for possible acquisition opportunities

Trend in Free Cash Flow

Source: Company Filings

  • The company generates robust cash flows due to favourable working capital cycle and no major capex plans
  • The Free cash flow for the company for fiscal 2019 was significantly higher than its reported net profit
  • As of fiscal 2019, FCFF per share for the company was INR 7.1 and the company was valued at around 14X on FCFF basis
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Performance in 9M Fiscal 2020

Stable Performance on revenue and margins front

Source: Company Analysis

  • The revenue growth during 9M fiscal 2020 was hampered due to performance of Household insecticides segment which de-grew by -5.6% on-year; the company attributed the same to sale of illegal incense sticks
  • The fabric care and dishwashing segment also subdued growth of 2% and 3.3% on-year respectively
  • The gross margin improved by 80 bps to 47.8% aided by soft raw material prices (crude oil linked)

New Launches…..

  • The company has already launched many new products over last few years but distribution has been restricted to Kerela and 2-3 other states
  • Ujala Crisp and Shine is currently distributed by the company in Kerala and Tamil Nadu; the company plans to extend it to Karnataka in fiscal 2021 and eventually to more states
  • The company launched new variant in its brand ‘Exo’ in super gel form during current fiscal in Kerala; the company will gradually ramp up the distribution in other states
  • The company typically launches its products in fabric care and dishwash segment in Kerala to test the waters; post market feedback and penetration in existing markets, the company then looks to expand to new geographies

Next Leg of Growth for the Company…

Expansion of existing products in new geographies and acquisitions are the only two possible growth avenues for the company

The company has largely been conservative in scaling up its operations across the country for product portfolio; going forward, the company will have to take an aggressive stance in distribution to promote growth

Jyothy Labs has been scouting for right acquisition candidate from 2018 onwards; the company plans to take inorganised route by acquiring brands within its existing range of products/segment.

Risks

Stiff competition across its product segment

  • In fabric care segment, the company faces competition from brands such as HUL’s Surf Excel & Wheel, P&G’s Ariel and the brand Nirma
  • In the dishwashing segment, HUL’s VIM is the leader with over 80% market share in the country

The company will therefore always face pricing pressure across segment except for Ujala Whitener product where the company is the market leader. Further, due to company’s relatively smaller scale of operations compared to other leading FMCG players in the industry, its ability to spend on Ad and Promotions to build strong brands will remain limited. This may constrain company’s ability to scale up aggressively.

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Ability of the next-gen management to deliver; stability of top management

The company recently had change in leadership with the second generation taking over as the Managing Director of the company

  • MR Jyothy – daughter of founder MP Ramachandran – was appointed was Managing Director of the company in March 2020, taking the reins over from Mr Ramachandran
  • MR Jyothy has been associated with the company for 14 years
  • In November 2019, company’s COO Rajnikant Sabnavis resigned; he was associated with the company since April 2016
  • Previously, Mr S Raghunanadan served as the company CEO during April 2012 and May 2016

Outside the the promoter family, Mr Ullas Kamath, the Joint Managing Director has been associated with the company from 1991. The company’s CFO – Mr Sanjay Agarwal is also not part of the family and has been associated with the company since 2018

The company has to ensure a stable and a professional top-level management going forward in-order to ensure continuation of its long-term strategy.

Peer Comparison

Source: Company Filings

  • Jyothy Labs’ ROCE and Operating Margin are lowest among peer FMCG companies
  • The sales growth however has been in-line with peers
  • However, the valuation gulf with industry peers is substantial and therefore provides possibility of a revaluation on performance revival (post Covid-19)

To Conclude…..

  • Jyothy Labs is one of the best home-grown FMCG companies and has successfully established strong brands such as Ujala, Exo, Pril, Henko and Margo
  • However, except for Ujala Whitener, the company does not enjoy leading market in any other product on Pan-India basis
  • The company has developed a strong distribution channel over the years through sale of Ujala product but is yet to effectively leverage it for other products in its portfolio; the company’s growth story will depend on efficient of the same
  • None of the company’s brands currently generate turnover of over INR 1,000 Crore and the company has to work towards the same
  • The company may have to aggressively spend on Ads and promotions in near future in-order to develop Ujala Crisp & Shine, Exo (super gel), Pril (tamarind) into pan-India products which may impact its margin over short-run
  • At 17.7X on P/E basis and 14X on P/FCFF basis, the company provides favourable investment opportunity with decent margin of safety

HAPPY INVESTING!



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Saurabh Prabhu
Stock Market. Cricket. F1 Enthusiast. Private Equity Professional . Ex- Crisil.
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