Clean profits

Jyothy Labs (JL) is widely known for its Ujala brand of fabric whitener used along with washing powders usually in washing machines. The company was started in 1983 as a single-brand company, with Ujala Fabric Whitener as its flagship product. However, over time, JL has grown by diversifying itself, both in terms of its product portfolio and market size across India. The company now is present in 5  different segments with its brands - fabric care (Ujala), household insecticide (Maxo), dish/surface cleaning (Exo), personal care (Jeeva) and air care segment (Maya). The company has 28 manufacturing facilities in 16 locations across India, of which some are tax-efficient units.

It started off with a South India focus but last year has changed that. In August ’11, it acquired an 84% stake in Henkel India, a subsidiary of German MNC Henkel AG. Till its acquisition by Jyothy, Henkel was a JV between the Dusseldorf-based Henkel AG and the Chennai-based A C Muthaiah group (thru its flagship company Tamil Nadu Petroproducts, TPL) with the German firm holding 51%. The JV was said to be the coming together of two formidable forces, one an international major with a strong footprint in Europe and North America, and a local company, which produced the raw materials that went into making detergents. The German parent had a presence in major areas such as laundry, home care, cosmetics, toiletries and hair care with international brands such as Pril, Fa, Mr. White and Henko. This was further consolidated with the acquisition of Shaw Wallace’s Calcutta Chemical Company in 2000, which gave the JV brands such as Chek, Margo and Neem Active toothpaste. Despite this, the company failed to take off and the main reason being cited is the differences between the partners. The Indian partner apparently had a limited role to play in the JV owing to its minority holding, while the German parent simply wasn’t devoting enough time and attention to the business since it was a small dot in their universe.

The company Henkel was grappling with too many problems - an underperforming business, mounting losses, huge debt, and a set of products that hardly evoked recall beyond the south and the east. Henkel operated in laundry & home care and beauty & personal care segments. Increasing competition in these two segments especially from the likes of Hindustan Unilever (HUL) & Procter & Gamble (P&G) led to the drop in sales. Both HUL and P&G waged a price war to capture share. Both dropped prices by almost 25-30 per cent in key brands such as Tide Naturals and Rin. The resultant war hit companies such as Henkel too who had to drop prices to stay competitive. The other major worrisome factor was Henkel’s inability to expand reach beyond the south and the east. Its distributors were mainly concentrated in the urban pockets of the two regions. After trying to revive the JV’s fortunes, the German parent decided to call it quits in the Indian market and sold off its stake to JL. With this acquisition, Jyothy Labs jumped in one shot from being a 5-brand company into the big league with six new brands in its stable, namely, Henko, Mr White, Fa, Pril, Margo and Neem. This has created several advantages for JL:

1. An added advantage of straddling the entire price spectrum from mid-premium, premium and niche.

2. Immense opportunities to explore in terms of achieving revenue and cost synergy, which will result in substantial revenue growth, leading to higher operating margin.

3. A balanced presence in the rural and urban areas, as JL’s ratio of rural and urban presence is 75:25 and that of Henkel was 30:70.

Over the last 15 months since the acquisition, JL management has earnestly put in place a turnaround strategy for Henkel which in turn will boost JL’s fortunes as well. The major steps being taken include:

1.  Decentralization of manufacturing operations of Henkel’s brands

2.  Raw material synergies due to non-dependency on TPL (which Henkel was earlier required to have due to TPL being its promoter). Also better negotiating leverage.

3.  Streamlining sale and distribution costs which were a major factor in Henkel’s problems

4.  Brand re-positioning

And the recent quarter results have validated the above steps with Henkel’s financials improving significantly. It is not out of the woods yet, but neither does it appear to be far off from profitability. Henkel’s return to green should have a cascade effect on JL’s bottom-line since most of the cuts had come from its acquisition.

Recently, JL announced plans to raise Rs. 550 Cr for 20% stake, to retire debts, arising out of last year’s Henkel buy. PE firms like TPG Capital, Advent International, Warburg Pincus and Bain Capital are in the fray to acquire stake in Jyothy Labs. JL is also in talk with GIC Singapore, UK’s Actis and Apax Partners.

A few years back, JL also forayed in the organized service sector with the launch of its laundry business thru a subsidiary Jyothy Fabricare Services. It is now touted as the biggest laundry chain in the country with 122 retail outlets in Bangalore, Delhi, Mumbai, Pune, Chennai and more recently Hyderabad, most of which have come from local acquisitions. This business though is still nascent and doesn’t contribute much to the top-line and/or bottom-line. IL&FS Investment Managers Ltd has invested Rs 100 crore in this business.

Recently, the company has appointed Mr. S. Raghunandan as its Chief Executive Officer (CEO). Mr. Raghunandan has worked with Reckitt Benckiser, Paras Pharma, Dabur India, and HUL, among others, at senior positions. The step seems to be a positive move at the right time since JLL-Henkel consolidation has been completed and the company is now ready for a takeoff. A professional man at the top can only take the company higher.

Though its valuations are not cheap by conventional norms, they are certainly cheap compared to other FMCG companies. While the biggies HUL and P&G (who are in the same business segments) quote at 5.18 and 6.2, and Godrej Consumer quotes at 7.74, JL quotes at just 4.12, though it is on a smaller scale than these. Also while Godrej and P&G quote at P/E multiple in excess of 40, JL is at 30 @170.

Considering the major drivers of increasing profitability with Henkel’s improving financials, foray into niche laundry services business (with value unlocking opportunities) and relatively cheap valuations compared to peers, this should take off over the next few quarters.