Jul 08, 2013 08:37 AM IST | Source:

Jyothy Labs bets on higher advertising to boost sales

Jyothy Labs is increasing ad spends to 10-12 percent. It will also expand Henkel brands, which were predominantly urban, into semi-urban and rural areas, while Jyothy's brands will be pushed more into the urban markets and modern trade.

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Nachiket Kelkar

Fast moving consumer goods firm Jyothy Laboratories is increasing its advertising spends to 10-12 percent in the current financial year from 6 percent earlier and instead of launching any new products is now focusing on expanding its existing products into newer markets to boost growth, especially in the highly competitive detergents and dish washing space.

It has also reduced retail and distribution margins and rationalised manufacturing to boost earnings, Ullas Kamath, joint MD, told in an interaction.

"We have earmarked 10-12 percent on advertisements. Historically we used to be at 6 percent at Jyothy. There are a lot of synergies that we have got in the last 2-3 quarters. So our thinking was that there is a saving of 10 percent and we can put 5 percent back in advertising," he said.

Jyothy acquired a majority stake in the Indian unit of German consumer goods major Henkel AG in 2011 and last year got board approval for its merger. But even two years since the deal, Jyothy has not been able to penetrate in many markets, like north India, for instance.

Last month, Jyothy launched its Ujala detergent powder, which it was only selling in Kerala, across all the southern states. Similarly, Margo toilet soap, which was strong in the south is now being expanded across the country and it is also launching a glycerin soap variant and face wash.

Kamath says the company will leverage the strengths of both Jyothy and Henkel to grow faster.

"Henkel was historically extremely strong in urban, so we are taking the Henkel brands (Henko detergent, Pril dishwash liquid) from urban to semi-urban to rural. Jyothy was historically strong with rural and semi-urban. Using Henkel distribution we are now putting Jyothy's brands like Ujala, Maxo and Exo more into urban. Henkel was extremely strong in modern trade (super markets), we were not. We are using that route to get into the modern trade," Kamath said.

All these things should help the company achieve a revenue growth of 20-25 percent in the current financial year, he said. It also has a target of 15 percent EBITDA (earnings before interest, taxes, depreciation and amortization) margin this year.

Also Read: Hindustan Unilever hits new high; parent ups stake to 67%

In 2012-13, post the merger, Jyothy reported a net profit of Rs 44 crore, down 47 percent year-on-year, even as net sales rose 54 percent to Rs 1,017 crore. EBITDA (earnings before interest, taxes, depreciation and amortization) margin was at 12 percent.

Its finance costs last year jumped to Rs 66 crore from Rs 19 crore.

Kamath said that the company was trying to bring down its working capital.

"Historically we used to block 40-45 days. Last year, our team managed to bring it down to 32 days. That gave us Rs 60 crore surplus cash, which we have paid to the banks," he said.

The company's loans have now come down to about Rs 500 crore from Rs 560-570 crore a year ago and its debt-equity ratio is now 0.75:1. Kamath said it would be more comfortable with a debt-equity ratio of 0.5:1.

He is confident Jyothy would be comfortably able to service its interest costs at 10.75 percent.

"If I am seeing 25 percent growth on topline, I should get an EBITDA of about Rs 200 crore. On the Rs 200 crore, if I can service the interest of Rs 50 crore, still I will be left with Rs 150 crore to pay the dividends and also to pay back the partial loans," he said.

Geojit BNP Paribas Research, which started covering the stock this month, has forecast Jyothy's margins at 13.5 percent for FY14 and 14.3 percent for FY15.

Analyst Rahul S feels additional spends on the relaunch of key brands like Henkel and Margo among other things will squeeze the benefits likely to accrue from Jyothy's business restructuring.

The Geojit BNP Paribas analyst has put an "accumulate" rating on the stock, but says the stock is currently trading at 30.5x, which is 22 percent premium to its historic average P/E.

"Over the next few quarters as the new restructured business evolves with signs of improving margins, this should form the guiding stone for future valuations. Any signs towards expanding margin will be taken very strongly by the market, making scope for re-rating and vice versa," Rahul S added.

Jyothy Labs shares closed up near 3 percent at Rs 185.75 on NSE on Friday. As of Thursday's close, the stock is  up near 9 percent so far this financial year, underperforming the wider CNX-FMCG index, which is up 14 percent.

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