See 25% topline and bottomline growth in FY13: Jyothy Labs

Jyothy Laboratories has been on our radar for some time now. The stock price is up 20% in the last trading sessions. It is 12% higher on Friday.

In an interview to CNBC-TV18, K Ullas Kamath, deputy managing director of Jyothy Laboratories says, the company's integration with Henkel is going on perfectly fine. "As committed, the new management team is in place. When two companies join together, especially in consumer goods space, there is huge synergy in distribution," he adds.

For FY13, he sees 25% top-line growth and 25% bottom-line growth. "EBITDA margin should cross 15% in the current year, both the companies put together," he adds.

Below is the edited transcript of his interview with CNBC-TV18's Latha Venkatesh and Ekta Batra.

Q: What is going right with your company? Is it got something to do with your integration with Henkel, anything positive that you can update your shareholders?

A: Integration is going on perfectly fine. As committed, the new management team is in place. When two companies join together, especially in consumer goods space, there is huge synergy in distribution.

In sales and distribution, Henkel has been phenomenally good in urban and we were extremely good in rural. So, both the companies’ joint together, now you will see Jyothy’s products all over and Henkel’s products all over. Whatever you are seeing now, in the last quarter and the coming quarter, it is just the synergy effect of distribution between both the companies.

Q: Your Q1 numbers very much indicated that perhaps you are able to take a lot of juice from these distribution synergies. You could manage operating margins of 12% compared to less than 9% year ago. So, it was a fairly decent improvement in margins. How much more can you draw for the rest of FY13 in terms of synergies?

A: FY13, our target is to cross EBITDA margin upward of 15%, both Jyothy and Henkel put together. We are increasing our spend on advertisement in the current year. From the historical 6-7%, we are going up to 10-12% depending on the season and product positioning. So, you will see lot of new initiatives having from the house of Jyothy.

However, being a conservative company, definitely we would like to see that we will achieve minimum 25% top-line growth, 25% bottom-line growth. EBITDA margin should cross 15% in the current year, both the companies put together that has been our target. As of now, we are dot on the target.

Q: Henkel's numbers, in previous quarter, you have recorded a loss in terms of the bottom-line. When exactly do you expect Henkel to breakeven on the bottom-line?

A: In the last quarter, the majority of money has gone in putting behind Margo brand. We have repositioned the Margo brand. You will see a lot of activities and advertisement from Margo because it is more than three-four years we have not spent on Margo. According to us, that is one of the finest brands in the country. So, it is just that quarter we spend the money because of the season. EBITDA wise, it is a positive. In the current quarter, you will see some good numbers.

Going forward, when both the companies merge together, which we hope to have before December 31, 2012, by March 2013, there will one single balance sheet of Jyothy Laboratories Limited, with that, some more synergies will happen. It is just that new management team is taking some good decisions in repositioning the brand and spending money on advertisement. That is the reason, in some quarters, you will see EBITDA going down and in some quarters you will see EBITDA going up. But otherwise everything is in place.

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Q: What exactly is sustainable EBITDA margin for Henkel? How exactly would you extrapolate that to the entire company? The reason I ask is because you recorded margins of around 10.2% in the previous quarter and you do have to pay royalty on two products going forwards as opposed to a bigger portfolio earlier. What would a sustainable average be in FY13 for you? How exactly would it reflect on consolidated numbers?

A: FY13, Henkel, we are thinking EBITDA margin upward of 16%. As a combined Jyothy Labs and Henkel together should be around 15%. That is our estimate. Most Henkel’s products are premium positioned. So, you can derive better EBITDA there when compared to Jyothi product portfolio.

As far as royalty is concerned, royalty is paid only on two brands, which are international ‘Pril’ and ‘Fa’. We are paying 2% of the net revenue. That is not big. It is not on the complete turnover of Henkel business. It is only on two brands and that too it is 2% on the net turnover.

With regards to consolidation and its effect on synergies, it is basically a distribution. In other words, when we have one distributor doing both the businesses, synergies will be far superior than two distributors doing two distribution at the same place. There will be reduction in distribution costs drastically. We are going to see that in March 2013 numbers.

Q: Are you going to have new product launches as well or even variants? Your mosquito repellent did excellently well in the Q1, you almost doubled your sales, any new product or variations of product launches?

A: We have launched liquid vaporisers in mosquito repellent segment. That is doing extremely well in the South now. Ujala has gone in a big way in the detergent powder space in the South. That is doing well. Margo has come out with a glycerin variant. So, there are a lot of things which are happening in the current year. You will see the result in the coming years.A lot of things are happening within the company; repositioning and also having brand extensions in all the segments in which we are present now.

Q: Can you keep this 70-71% run rate for the full year in terms of sales growth?

A: No not at all. We will be happy, if we are 20-25% on the top-line growth because the effect what we got in the Q1 cannot be taken for the entire year. So, 25-30% top-line growth and 25% bottom-line growth, being very conservative.

Q: What exactly would be the debt situation on the company on a consolidated basis and any non-core assets you would like to divest to reduce it?

A: Yes, a few of the assets are on the block. We are getting good enquiries. If we get a right price, probably we will liquidity Rs 100-150 crore before the year end. That is our hope. Unless we get a right price, we will not sell the real estate, but we do have the land bank which is not being used.

Debt as of now is Rs 550 crore on our combined balance sheet. By the year-end, excluding real estate sale, we should be able to bring it down by about Rs 100 crore through internal accruals. We are also going towards a negative working capital. Historically, Jyothy has been on the positive working capital. Now, we are looking towards negative working capital. So, in 2014, we should be able to bring it down by another Rs 200-250 crore because of the internal accruals and because of going towards negative working capital.

Net-net, we are not worried on the debt. As of now, we are comfortably servicing the debt out of the Henkel business alone. So, to that extent, the company is comfortable.

Q: Is it only real estate that you would be looking at in terms of divestment strategies or would it be some sort of brand, which you might look to offload as well at a good valuations?

A: Not at all. Now that we are into four big categories with 10 brands, our job is to consolidate everything and work as a FMCG company with all the four categories together. We will be extremely happy to build all the brands and no such intention at this point in time.