Jyothy Laboratories - Business reboot to mar FY13 prospects; Sell - Anand Rathi

Though we are enthusiastic about Jyothy Laboratories' (Jyothy) strategy of creating a long-term business model, its FY13 earnings are likely to be volatile. This is because three key events scheduled for FY13 now stand postponed to FY14: (1) land sale, (2) accrual of benefits from distribution restructuring in FY12 and (3) turnaround in mosquito repellent business. Hence, we downgrade the stock to a Sell, with a price target of Rs.130.

- FY13 to be the year of consolidation. The company plans to change its entire distribution structure and categorise all its brands. It plans to launch variants and re-launch most brands. It has also divided brands into those focused on and those less-focused-on. We expect the changes in its entire business structure to lead to volatility in its results in FY13.

- Change in distribution structure. In-line with other FMCG companies it now plans to redesign its sales structure and driving sales through zonal sales managers. It will service its distributors using 28 C & F agents network and dismantle its own 67 depots. It will also start selling products on cash and will do away with the two-week-credit system. It has cut distributor margins (from 8% to 6%) and reduced retailer margins by 200bps.

- Land sale unlikely in FY13. The company was looking to sell its Karaikal, Ambatur and vacant office at MIDC, Andheri, Mumbai properties for ~Rs.2bn and repay part of its debt. However, it has now decided to wait until its merger with Henkel, likely in FY14.

- Mosquito-repellent business in investment mode until FY13. The company plans to re-launch its Maxo brand and subsequently introduce variants and products under it. More investment in mosquito repellents would result in lower profitability in FY13.

- Valuation. We value the stock at Rs.130 (earlier Rs.151), at a target PE of 23x Sep'13e earnings. Risk: Lower raw material prices.

Source : Equity Bulls

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