Jyothy Laboratories races ahead of the pack

Although sales grew in single digits, operating profit rose by 17.1% and margin gained by 1.3 percentage points over a year ago


Apart from a lower increase in raw material costs, advertisement and sales promotion expenses were flat during the quarter.
Apart from a lower increase in raw material costs, advertisement and sales promotion expenses were flat during the quarter.

Jyothy Laboratories Ltd’s share rose 4% on Tuesday. It has gained 22.7% in the last one month, outperforming the S&P BSE FMCG index, which is up a mere 1%.

The Jyothy Laboratories stock’s rise began some days after its June quarter results were declared. That quarter saw its sales rise by 8.9% in value, lower than the 10.2% volume growth it returned. That’s a good volume growth to have, at a time when overall growth is slowing. The market expectation would be that the company can keep up this level of volume sales growth, especially as consumption growth is expected to revive, first in urban and then in rural parts of the country.

Jyothy Laboratories had said that urban demand has improved though rural demand is yet to pick up, after its results were declared. A good monsoon is expected to pep up rural demand to an extent. What stands out in the company’s case is it attained this growth despite an 11.3% decline in household insecticide sales. This segment contributes 8% of sales. An extended summer hit sales growth in this segment.

Sales in fabric care, its main segment, rose by 10.8% and in dishwashing by 9.9%. These two segments contributed to over three-fourths of sales during the quarter. Its flagship Ujala fabric whitener’s sales rose by 10% with the Henko brands growing by 9.6%. Personal care is a relatively small segment but did well with sales rising by 14.1%.

Although sales grew in single digits, operating profit rose by 17.1% and margin gained by 1.3 percentage points over a year ago. Apart from a lower increase in raw material costs, advertisement and sales promotion expenses were flat during the quarter. Net profit rose by a much higher 77.9% but this was chiefly due to lower tax incidence during the quarter, although finance costs declined too.

The rise in the stock signals high expectations that investors expect the company’s operating performance will continue to be robust. That can also mean a continued improvement in its cash flows. In fiscal year 2016, Jyothy Laboratories’ net cash generated from operations rose by 24.5% to Rs191.5 crore. That should help partially fund its debt repayments. Debentures worth Rs400 crore come up for repayment in November.

Jyothy Laboratories’ shares are quite expensive, valued at 43 times estimated earnings, according to analyst estimates compiled by Reuters. Earlier, in June its shares had run-up on speculation that Henkel AG and Co. may exercise its option (which was pursuant to Jyothy’s acquisition of Henkel India in 2011) to take up to a 26% stake in the company in FY17. Nothing came of that, but that event (or non-event) bears watching too.

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