Jyothy Laboratories Ltd’s new business structure is falling in place nicely, and is closer to becoming a more efficiently structured consumer business. Some of those benefits are visible already. A bigger test lies ahead in 2013-14, when it will attempt to scale up sales growth on the back of this new structure.
After acquiring Henkel India Ltd, Jyothy has undertaken a major overhaul of how it does business. What is visible now is an improvement in operating profit margin (OPM), which came in at 17.9%, 90 basis points higher than in the year-ago period, and up 5.3 percentage points sequentially. A basis point is one-hundredth of a percentage point.
This was despite a 28% increase over the year-ago period in Jyothy’s cost of goods sold. This was far ahead of sales growth, but relatively flat growth in employee costs and other expenditure helped margins improve. Jyothy’s management believes a 17% OPM is sustainable, and expects it can maintain this level in 2013-14 too.
That comes on the back of its expectation that consolidated revenue can rise by about 20%-plus next year. Jyothy currently presents its results separately as the merger of Jyothy Consumer Products Ltd (Henkel’s new avatar) is not official yet. On a consolidated basis, revenue rose by only 2%, and OPM was 12%. As part of its restructuring, a newly recruited team is working on a marketing strategy for all key brands. If that works well, then next year should see a significant improvement in sales growth. It has a low base effect benefit, too, as sales growth in the current year had been hit by the restructuring process.
The key factor is whether it can grow while maintaining margins. Jyothy’s share has risen by 66% in the past 12 months, as investors stocked up shares in anticipation of an improvement in performance. The share trades at a price-to-earnings multiple of 17 times forecast 2013-14 earnings per share, based on estimates polled by Thomson Reuters. That seems reasonable given its current performance, especially if it can stick to the script in 2013-14.