Investor's Eye: Update - Jyothy Laboratories (Strong performance to sustain; price target revised to Rs278), Telecommunications (New developments chronicled)

 

Investor's Eye [December 19, 2013]  Sharekhan www.sharekhan.com

Summary of Contents     STOCK UPDATE Jyothy Laboratories Recommendation: Buy Price target: Rs278 Current market price: Rs195 Strong performance to sustain; price target revised to Rs278 We met the management of Jyothy Laboratories Ltd (JLL) to understand the impact of the general slowdown in consumer spending on the company's business and the sustainability of the exponential growth shown by the company in H1 of FY2014. The management is confident of further building on the growth momentum with a guidance of a more than 25% average revenue growth and an operating profit margin (OPM) in the range of 15.0-15.5% (as against 11.7% in FY2013) for 2014 and FY2015. The growth and margin improvement will be driven by the rationalisation of distributors' margins, the integration of Henkel and the relaunch/repositioning of its seven power brands. In addition, the repayment of debt by using the monies raised through a preferential allotment to the promoters and the issuance of zero coupon non-convertible debentures (NCDs) would result in interest cost savings of Rs45-50 crore at the consolidated level in FY2015. Consequently, JLL's earnings are estimated to grow at a compounded annual growth rate (CAGR) of 65% over FY2013-16 with a significant improvement in the return ratios. Despite the exponential growth in the earnings and the outperformance, the stock is available at a stark discount to some other mid-cap fast moving consumer goods (FMCG) stocks and provides significant upside from the current level to our revised price target of Rs278. We maintain JLL as our top pick in the mid-cap FMCG space. Key points  Strong growth momentum to sustain in the coming years: Despite persistent slowdown concerns, the management of JLL is confident of delivering a strong financial performance in the second half of the year. Therefore, it is likely to end FY2015 with a revenue growth of close to 25% and a strong improvement in profitability. We believe strategic media spending on the key brands, the restructuring of the distribution network, innovation/renovation in the product portfolio and strong offtake of products in rural India would be the key growth drivers in the coming years. In the first half of FY2014 Ujala fabric whitener registered a strong growth under the new packaging while Exo round gained good traction in the domestic market. In the coming quarters we will see a slew of launches of variants/relaunches in the household insecticide (HI; Maxo), personal wash (Margo) and fabric whitener (Ujala) categories. In view of the sustenance of the strong performance of the power brands, we expect JLL's revenues to grow at a CAGR of about 20% over FY2013-16 (driven largely by higher volumes). OPM to sustain at around 15%: In H1FY2014 JLL's OPM stood at 14.6% (up 410 basis points year on year [YoY]). The management is confident that it would be able to maintain the gross profit margin (GPM) in the range of 47-48% going ahead as the full impact of both the rupee's depreciation and the high inflation was absorbed in H1FY2014. Hence, the company does not intend to go for any significant price increases in its product portfolio. The improvement in the revenue mix with an increased contribution from the high-margin products would boost the GPM in the medium to long term. The company has indicated it will continue to support its brands with extensive media spending, but would try to curtail the other expenditures. This would help in sustaining the OPM in the range of 15.0-15.5% in the coming years. Debt restructuring would fuel the bottom line growth: JLL raised over Rs650 crore through a preferential allotment of 1.5 crore shares amounting to Rs263 crore to the promoter. It also raised Rs400 crore by issuing zero coupon NCDs. The amount raised would help JLL to save interest cost of around Rs45-50 crore per annum which would, in turn, boost the bottom line and strengthen the operating performance in the coming years. Earning estimates upgraded due to clarifications on changes in financial model: The management has clarified to us that the amortisation of goodwill and brand of Rs44.7 crore would not appear in the consolidated balance sheet since Jyothy Consumer Products Ltd (JCPL) was already consolidated in FY2012. Hence, it will continue to appear only in the stand-alone financials over the next nine years. This along with expectation of interest cost savings of around Rs45-50 crore in FY2015 and FY2016 has led to a significant upward revision in our earnings estimates. The management of JLL has indicated it will start providing consolidated financials for better understanding from Q1FY2015. Maintain Buy with revised price target of Rs278: In FY2013 and FY2014 JLL undertook measures (revamp of the management team, restructuring of the distribution system, relaunch of the key products, aggressive media spending and restructuring of debt) to improve its business fundamentals in the long run. We believe these strong actions would help its portfolio of power brands to gain strong traction over FY2015-16. Hence, we are confident that JLL will grow its revenues at over 20% and see a strong growth in its bottom line in the coming years. In view of the upward revision in the earnings estimates, our price target has also been revised to Rs278 (valuing the stock at 21x of the average of the FY2015 and FY2016 estimated earnings) from the perspective of the next 12-18 months. The current valuation of the stock at 16.2x FY2015E earnings and the strong visibility of the company's earnings make JLL one of the preferred picks in the mid-cap FMCG space. We maintain our Buy recommendation on JLL.   SECTOR UPDATE Telecommunications New developments chronicled In the last two months, the Indian telecommunications (telecom) space has been witness to a series of events: (a) the fixing of the spectrum reserve price, (b) the acceptance of the draft merger and acquisition guidelines by the Union Cabinet, (c) the infrastructure joint venture between Reliance Jio and Bharti Airtel, and (d) the release of the document of notice inviting auction applications. We believe that these regulatory moves are pro-industry and encourage consolidation. Further, as highlighted in our previous sector updates, the competitive environment is turning rational and collaborative in nature, and the Reliance Jio and Bharti Airtel agreement to share infrastructure is another milestone that supports our thesis of a healthy and rational competitive environment. Thus, in light of these developments we maintain our constructive stance on the sector, with Bharti Airtel as our preferred pick. In this note, we enumerate the latest developments in the sector, report on the GSM subscriber addition and discuss the key points of the notice inviting application (NIA) document. GSM subscriber net addition trend for November 2013 The Cellular Operators' Association of India (COAI) has released its subscriber base figures for November 2013. For November, the industry (excluding Reliance Communications [RCom] and Tata Teleservices both of which also have a CDMA base) added 4.87 million subscribers on a cumulative basis. That is 12.2% higher compared with the last month's addition. Bharti Airtel added the highest number of subscribers (up 1.72 million), followed by Aircel and Vodafone India, which added 1.36 million and 1.34 million subscribers respectively in November the month. Click here to read report: Investor's Eye   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards, The Sharekhan Research Team

 

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