Stock pick of the week: Jyothy Labs has improved fundamentals

The first quarter results of Jyothy Laboratories were better than expected on all fronts. With the help of 16.5% growth in the soaps and detergent segment, its revenue grew by 13% compared with that in the same period last year. An improvement in the EBITDA margin due to better realisation and sales mix helped the company show an EBITDA and net profit growth of 49% and 103%, respectively, in the quarter.


Though the current valuation of Jyothy Laboratories is on the higher side, it seems justified due to a higher, expected sales/net profit growth in the coming years. The growth rate is getting an extra boost because of the successful amalgamation with Jyothy Consumer Products ( JCP), formerly known as Henkel India.

The company management has been able to use all possible synergies to its advantage. First, the company has already merged its distribution channel, reduced distributors’ margins and revamped the supply chain management. Second, it is in the process of consolidating its manufacturing units to bring down the production cost by increasing scale. Third, the accumulated losses of the acquired company, JCP, will shield the net profit of Jyothy Laboratories from income tax.

The acquisition has also increased the brand power of Jyothy Laboratories and it now has 10 leading brands under its belt. More importantly, the amalgamation has strengthened its geographical presence. To increase its reach, Jyothy Laboratories is increasing the advertising and sales promotion expenditures, which has gone up by 69% in the first quarter.

However, to fight the economic slowdown and competition, the company is focusing only on its top seven ‘power’ brands—Ujala, Henko, Exo, Pril, Margo, Fa and Maxo. The renewed effort in brand consolidation/brand differentiation has also started yielding fruit. Its flagship brand, Ujala fabric whitener, reported a handsome 37% sales growth in the first quarter, after its relaunch with new packaging. Though the home care division’s revenue fell by 2% in the first quarter, the management is taking remedial measures. Due to this, Maxo’s performance is expected to improve in the coming quarters and likely to report a revenue growth of 20% in 2013-14.

Selection methodology: We pick the stock that has shown the maximum increase in consensus analyst rating during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weightages to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in the rating indicates that the analysts are becoming more bullish on the stock. To ensure that we pick only those companies that have a decent analyst coverage, this search is restricted to stocks that have been covered by at least 10 analysts.