Pressure on profits; Valuations seem attractive

Jyothy’s Q3FY11 numbers were in-line with our expectations. Net sales growth of 10% was led by 16% growth in Ujala and 40% growth in Exo brands. Maxo declined by 16% on lower volume as a result of partial withdrawal of promotional schemes and late monsoons. Gross margins improved 24bps on 16% price increase for Ujala Supreme and 7% withdrawal of sales scheme on Maxo. However, 200bps jump in SG&A owing to TV campaigns for the Ujala brand affected performance, resulting in 185bps reduction in EBITDA margins. Higher other income (interest on QIP funds invested in FMPs) was offset by higher tax burden due to which PAT was flat. We downgrade our FY12 earnings estimates by 18% considering continuation of aggressive marketing efforts, higher input cost and lower volume traction of Maxo. We maintain BUY with reduced TP of Rs281 (from Rs307).

Volume pressure dents revenue growth

Revenue growth of 10% in Q3 was the lowest in the past 6-7 quarters. Although Jyothy undertook a 16% price increase for Ujala Supreme, the Fabric care category grew only 16%, indicating volume pressure. Delayed monsoons coupled with partial withdrawal of promotional schemes impacted Maxo’s volumes leading to a decline of 16%.

Strain on profitability

Slower growth (~11%) in gross profit with 37% rise in SG&A ranslated into 5% decline in EBITDA. However, jump in other ncome resulted in flat growth in PAT.

VALUATIONS AND RECOMMENDATION

We are bullish on Jyothy’s long-term growth as these marketing efforts will reap benefits going forward. The company is trying to get into new orbit with national roll-out of key brands and to stabilise its laundry business. We assign a PEG multiple of 18x on core EPS FY12 (Rs14/share - excluding other income from QIP funds) and add Rs28/share QIP cash to derive at a TP of Rs281. We maintain ‘BUY’ on Jyothy. Further delay in Maxo military and exceptional rise in crude-based inputs can lead to deviation of actual earnings from our estimates.