Buy Jyothy Labs; target of Rs 246: PINC Research

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Buy Jyothy Labs; target of Rs 246: PINC Research

PINC Research is bullish on Jyothy Labs and has recommended buy rating on the stock with a target of Rs 246 in its August 25, 2011 research report.

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PINC Research is bullish on Jyothy Labs and has recommended buy rating on the stock with a target of Rs 246 in its August 25, 2011 research report.

"We recently met the management of Jyothy Labs (Jyothy). The restructuring of 3-tier distribution channel into 2-tier formed a major part of the discussion. The process of doing away with the Superstockists from the distribution channel impacted Q1FY12 performance."

"East and North India markets contribute ~60% of Jyothy's sales and were based on 3-tier model. Jyothy has transformed ~75% sales into 2-tier and rest of the sales is expected to convert in the next 2-3months. South India has already been 2-tier market since last three years. In West India, Maharashtra forms a 2-tier market while Gujarat, a small market for Jyothy is a 3-tier market. Jyothy management expects to bring all the markets into 2- tier markets by the end of Dec'11. The new distribution model would save ~3% in the distribution margin as well as reduce the working capital requirement. However, the benefits would be visible FY13 onwards. Jyothy raised prices of Ujala Supreme by Re1 to Rs15/75ml in Q4FY11. The benefits of this new pack, launched in July'11 month, would start trickling in from Q2FY12 onwards. The supply of Maxo Military to DRDO has started in July'11 and the contract is for ~Rs300mn sales in FY12. This is a ~35% EBITDA margin business."

"The strong operational performance of Henkel India in Q2CY11 is expected to maintain going forward. The reduction in the staff cost and other overheads like traveling and advertisements were the key reasons for better performance during Q2CY11. However, the full impact of staff cost reduction will benefit from Q3CY11 onwards. Jyothy management guided Henkel India to post Rs5bn sales and ~10% EBITDA margin in FY13. We believe rationalisation of debt burden will be delayed for the next year as dilution of equity seems difficult in the current scenario. The process of selling Henkel's Karaikal unit is expected to be delayed due to some labour issues."

"Jyothy management has guided normal sales from Aug'11 onwards. We believe business has bottomed out and there can be no further fall from this level. The business is now at an inflection point and the U-turn upwards would begin in Q2FY12 and we expect sustained improvement thereafter. We have been cautious in our estimates for FY12 as Jyothy is in the transformation phase. We see numerous operational synergies from the Henkel acquisition, which would engender long-term and medium-term positives for Jyothy Labs and improve overall profitability," says PINC Research report.

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To read the full report click on the attachment