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Hold Jyothy Labs target price Rs 210: SBICap

SBICap Securities has given a hold rating on Jyothy Laboratories with a target price of Rs 210.

Jyothy Laboratories (JLL) reported a disappointing set of results in 2QF15, as the bottom line fell 32% short of SBICap estimates on the back of adverse sales mix. Net sales came at Rs3.55bn, up 16% YoY (11% below SBICap estimates) falling short of the management guidance of 25% growth in F15e. Top line miss was attributable to slowdown in Ujala, which grew just 6% in 2QF15 as opposed to the 25%+ growth registered last year. Ebitda came at Rs 350 million down 18% YoY, led by squeeze in gross margin by 100bps due to lower saliency of highest margin grosser Ujala and due to steep increase in employee expenses (partly due to ESOPs) and ad-spends (launch costs of Henko pan-India). PAT was Rs 331mn, up 57% YoY (32% below SBICap estimates).

“We introduce F17e with 20% sales/bottom-line growth assumption and slight decline in gross margin (-50bps) due to overall mix shifting away from most lucrative product Ujala for Jyothy Labs. We maintain our target price of Rs 210 and our hold rating on the stock,” the brokerage said.

Consolidated net sales grew 16% YoY this quarter, led by 9% YoY volume growth. The mix was adverse during this quarter as Ujala grew just 6% and hence the S&D category witnessed 641bps/363bps margin reduction in 2QF15/1HF15. We believe that saliency of Ujala will reduce (fall below 28% of sales going ahead) and brands like Henko, Margo and Exo will have higher weightage. The mix will be unfavourable, as these products are into highly competitive segments with big players dominating the market and a history of showing aggression through promotional offers.

JLL is in the process of re-launching Henkomatic with Lintelligent technology, the adverts for which have been on air since 1QF15. The company plans to grab 20% shelf share in Matics and 10% share in super premium handwash powders with Henko Stain Champion. Henko Stain Champion was repackaged for the same in 2QF15. JLL also plans to launch Exo in bar format as the product is more profitable than their flagship design Exo Round due to packaging costs. We believe this will bring JLL head-to-head against market leader Vim (HUL), with 60% share and we can expect HUL to react adversely. Currently, the bar format has been launched only in Exo-strong markets like South India.

“We cut our estimates for F15e/F16e by 13%/16% due to adverse sales mix as salience of Ujala is diminishing within the business model, leading to lower gross margin for the portfolio. We introduce F17e with 20% sales/bottom-line growth assumption and slight decline in gross margin (-50bps) due to overall mix shifting away from most lucrative product Ujala for Jyothy Labs. We maintain our target price of Rs210 and a hold rating on the stock,” the brokerage said.

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