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RETAIL RESEARCH Page | 1 HDFC sec Scrip Code Industry CMP (Rs.) Recommended Action *Entry Band (Rs.) Price Target (Rs.) Time Horizon JYOLABEQNR FMCG 236 Buy on dips 210-219 247 1 quarter *Applicable till the next results are announced In our Q1FY15 Result Update dated Aug 25, 2014, we had recommended investors to buy Jyothy Laboratories Ltd. (JLL) at the then CMP of Rs. 222.7 and to average it on dips to Rs. 194-205 for a price target of Rs. 240 over the next quarter. Thereafter, the stock met our price target on Sept 04, 2014 and subsequently touched a new high of Rs. 300 on Sept 11, 2014. Currently, it is quoting at Rs. 236. JLL’s Q2FY15 results were in line on the revenue front, but were significantly below our estimates on profit front, impacted by higher input cost, A&P cost & staff cost (ESOP charge of Rs .60 mn, which was unexpected). We present an update on the stock. Q2FY15 Results Review (Consolidated) Y-o-Y The consolidated net sales grew by 16.2% to Rs. 3676.7 mn [Q2FY14: Rs. 3165.3 mn], led by healthy growth across soaps & detergents (up 19.9% Y-o-Y) and laundry business (up 17.3%; though on a low base). The growth was driven by a mix of volume growth (9%) and price hikes (6.8%). Fabric care grew by 15% led by strong growth in Henko, which was relaunched in June 2014). Ujala Fabric whitener disappointed with single digit growth of ~6% Y-o-Y (in comparison with the double digit growth in the previous quarter). Dishwashing segment grew by 17%, led by Exo dishwashing bar & Pril liquid, which reported healthy growth of 17% each. Home Care segment (includes Mosquito repellant MAXO, Incense sticks & Exo scrubber) grew marginally by 2.8% Y-o-Y with Mosquito Repellent segment growing in single digit by 5%, impacted by below normal rainfall, especially in northern India and extended summer. Personal segment reported strong growth of 40% led by Margo soaps (up 48% in value terms; volume growth 37%) Others segment (which includes body care, tea & coffee) declined by 3.8% Y-o-Y. Gross margins contracted by 92 bps Y-o-Y on the back of higher input prices of LAB & PFAD. Operating profit declined by 9.2% Y-o-Y, while OPM declined by 254 bps Y- o-Y to 9.1% due to declined in gross margins, higher staff cost (due to inclusion of ESOP expenses of Rs. 60 mn) & higher A&P spends (up 18.2%, 31.8% & 49.2% Y-o-Y respectively). However, 1.4% decline in other expenses restricted further contraction in OPM. Segment-wise, Soaps & Detergents and Others witnessed margin contraction, while Home Care witnessed margin expansion & Laundry business losses reduced marginally from Rs. 29.1mn in Q2FY14 to Rs. 27.3 mn in Q2FY15. Despite decline in OPM, PAT grew by 72.3% Y-o-Y, while PAT margins improved by 223 bps Y-o-Y to 6.8%, aided by lower interest cost (down 81.2% Y-o-Y on the back of conversion of interest bearing term loans to zero coupon debentures), NIL tax rate (compared to 2.1% in Q2FY14) and higher other income (up 255.9% Y-o-Y). EPS for the quarter stood at Rs. 1.4 vs. Rs. 0.8 in Q2FY14. Reported net income without considering ESOP expenses of Rs. 60 mn stood at Rs. 312 mn, up 113% Y-o-Y, but still below our estimates. Q-o-Q Sequentially, the results appeared subdued. Net sales de-grew by 4.5% Q-o-Q, led by weak performance from Soaps & Detergents and Others segment (down 9.8% & 28.8% Q-o-Q). However, Home Care & Laundry Services grew by 18.4% & 6% Q-o-Q respectively. RETAIL RESEARCH Nov 14, 2014 Jyothy Laboratories Ltd. (JLL) Q2FY15 Result Update

Jyothy Labs: Higher input cost impacts profit in Q2FY15

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The stock offers limited upside from the current levels. For better returns and margin of safety, we feel investors could buy the stock on dips to Rs. 210-219 (23- 24xFY16RE EPS) for our price target over the next quarter.

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RETAIL RESEARCH Page | 1

HDFC sec Scrip Code Industry CMP (Rs.) Recommended Action *Entry Band (Rs.) Price Target (Rs.) Time Horizon

JYOLABEQNR FMCG 236 Buy on dips 210-219 247 1 quarter

*Applicable till the next results are announced In our Q1FY15 Result Update dated Aug 25, 2014, we had recommended investors to buy Jyothy Laboratories Ltd. (JLL) at the then CMP of Rs. 222.7 and to average it on dips to Rs. 194-205 for a price target of Rs. 240 over the next quarter. Thereafter, the stock met our price target on Sept 04, 2014 and subsequently touched a new high of Rs. 300 on Sept 11, 2014. Currently, it is quoting at Rs. 236. JLL’s Q2FY15 results were in line on the revenue front, but were significantly below our estimates on profit front, impacted by higher input cost, A&P cost & staff cost (ESOP charge of Rs .60 mn, which was unexpected). We present an update on the stock. Q2FY15 Results Review (Consolidated) Y-o-Y The consolidated net sales grew by 16.2% to Rs. 3676.7 mn [Q2FY14: Rs. 3165.3 mn], led by healthy growth across soaps & detergents (up 19.9% Y-o-Y) and laundry

business (up 17.3%; though on a low base). The growth was driven by a mix of volume growth (9%) and price hikes (6.8%). Fabric care grew by 15% led by strong growth in Henko, which was relaunched in June 2014). Ujala Fabric whitener disappointed with single digit growth of ~6% Y-o-Y (in comparison with the double digit growth in the previous quarter). Dishwashing segment grew by 17%, led by Exo dishwashing bar & Pril liquid, which reported healthy growth of 17% each. Home Care segment (includes Mosquito repellant MAXO, Incense sticks & Exo scrubber) grew marginally by 2.8% Y-o-Y with Mosquito Repellent segment growing in single digit by 5%, impacted by below normal rainfall, especially in northern India and extended summer. Personal segment reported strong growth of 40% led by Margo soaps (up 48% in value terms; volume growth 37%) Others segment (which includes body care, tea & coffee) declined by 3.8% Y-o-Y.

Gross margins contracted by 92 bps Y-o-Y on the back of higher input prices of LAB & PFAD. Operating profit declined by 9.2% Y-o-Y, while OPM declined by 254 bps Y-o-Y to 9.1% due to declined in gross margins, higher staff cost (due to inclusion of ESOP expenses of Rs. 60 mn) & higher A&P spends (up 18.2%, 31.8% & 49.2% Y-o-Y respectively). However, 1.4% decline in other expenses restricted further contraction in OPM. Segment-wise, Soaps & Detergents and Others witnessed margin contraction, while Home Care witnessed margin expansion & Laundry business losses reduced marginally from Rs. 29.1mn in Q2FY14 to Rs. 27.3 mn in Q2FY15.

Despite decline in OPM, PAT grew by 72.3% Y-o-Y, while PAT margins improved by 223 bps Y-o-Y to 6.8%, aided by lower interest cost (down 81.2% Y-o-Y on the back of conversion of interest bearing term loans to zero coupon debentures), NIL tax rate (compared to 2.1% in Q2FY14) and higher other income (up 255.9% Y-o-Y). EPS for the quarter stood at Rs. 1.4 vs. Rs. 0.8 in Q2FY14. Reported net income without considering ESOP expenses of Rs. 60 mn stood at Rs. 312 mn, up 113% Y-o-Y, but still below our estimates.

Q-o-Q Sequentially, the results appeared subdued. Net sales de-grew by 4.5% Q-o-Q, led by weak performance from Soaps & Detergents and Others segment (down 9.8% &

28.8% Q-o-Q). However, Home Care & Laundry Services grew by 18.4% & 6% Q-o-Q respectively.

RETAIL RESEARCH Nov 14, 2014 Jyothy Laboratories Ltd. (JLL) – Q2FY15 Result Update

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The core operating profit de-grew by 35.7% Q-o-Q, while OPM declined by 441 bps Q-o-Q, impacted by higher employee cost, ASP cost & other expenses (up 12.4%, 10% & 2.6% respectively). Soaps & Detergents witnessed significant margin contraction (down 562bps), while Home Care & Others witnessed margin improvement sequentially and Laundry business losses reduced from Rs. 31.2 mn in Q2FY14 to Rs. 25.3 mn in Q2FY15.

PAT fell by 40.8%, while PAT margins fell by 419 bps Q-o-Q, led by higher interest & depreciation cost (up 3.4% & 7.6% Q-o-Q respectively).

Quarterly Financials: Consolidated (Rs. in Million)

Particulars Q2FY15 Q2FY14 VAR [%] Q1FY15 VAR [%] Net Sales 3676.7 3165.3 16.2 3851.4 -4.5 Other Operating Income 2.1 1.6 31.3 3.4 -38.6 Total Income 3678.8 3166.9 16.2 3854.8 -4.6 Total Expenditure 3344.6 2798.9 19.5 3334.9 0.3 Raw Material Consumed 1087.2 739.5 47.0 1233.6 -11.9 Stock Adjustment 49.6 22.6 119.5 -79.3 -162.6 Purchase of Finished Goods 781.2 859.9 -9.2 857.6 -8.9 Employee Expenses 433.4 328.8 31.8 385.4 12.4 Advertisement & Sales Promotion 463.1 310.4 49.2 421.1 10.0 Other Expenses 530.1 537.7 -1.4 516.4 2.6 Operating Profit 334.2 368.0 -9.2 519.9 -35.7 Other Income 39.5 11.1 255.9 19.7 100.9 PBIDT 373.7 379.1 -1.4 539.6 -30.7 Interest 34.8 184.7 -81.2 33.7 3.4 PBDT 338.9 194.4 74.3 505.9 -33.0 Depreciation 87.3 60.5 44.3 81.1 7.6 PBT 251.6 133.9 87.9 424.8 -40.8 Tax (including DT & FBT) 0.1 2.8 -96.4 0.6 -83.4 Reported Profit After Tax 251.5 131.1 91.8 424.2 -40.7 Minority Interest/ Share in profit 0.1 -1.2 -108.3 -0.5 -121.6 Reported Profit after minority interest 251.4 132.3 90.0 424.6 -40.8 Extra-ordinary Items 0 -13.6 - 0.0 - Adjusted PAT 251.4 145.9 72.3 424.6 -40.8 EPS (Rs.) 1.4 0.8 72.3 2.3 -40.8 Equity 181 181 0.0 181.0 0.0 FV 1 1 0.0 1 0.0 OPM (%) 9.1 11.6 -21.8 13.5 -32.7 PATM (%) 6.8 4.6 48.3 11.0 -38.0

(Source: Company, HDFC sec)

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Quarterly Segmental Financials: Consolidated (Rs. in Million)

Particulars Q2FY15 Q2FY14 VAR [%] Q1FY14 VAR [%] Segment Revenue 3692.9 3201.2 15.4 3880.0 -4.8 Soaps and Detergent 2745.3 2289.2 19.9 3045.2 -9.8 Home Care 797 775.6 2.8 673.0 18.4 Others 42.8 44.5 -3.8 60.2 -28.8 Laundry Services 107.8 91.9 17.3 101.7 6.0 Less : Inter Segment Revenues 16.1 36 -55.3 28.6 -43.7 Total Segment Revenue 3676.8 3165.2 16.2 3851.4 -4.5 PBIT 301.2 356.4 -15.5 485.9 -38.0 Soaps and Detergent 277.4 357.1 -22.3 478.9 -42.1 Home Care 45.4 21.8 108.3 37.1 22.3 Others 5.7 6.6 -13.6 1.5 274.8 Laundry Services -27.3 -29.1 -6.2 -31.7 -13.9 Less : Interest 34.8 184.7 -81.2 33.7 3.4 Other Un-allocable Expenditure 54.3 33.6 61.6 48.7 11.6 Other Un-allocable Income/Except Item 39.4 -4.1 -1061.0 21.2 85.5 Net Profit/Loss Before Tax 251.5 134.0 87.7 424.8 -40.8 PBITM (%) 8.2 11.1 -298 bps 12.5 -437 bps Soaps and Detergent 10.1 15.6 -549 bps 15.7 -562 bps Home Care 5.7 2.8 289 bps 5.5 18 bps Others 13.3 14.8 -151 bps 2.5 1079 bps Laundry Services -25.3 -31.7 634 bps -31.2 587 bps Capital Employed in Segment Soaps and Detergent 2993.1 3465.1 -13.6 2849.1 5.1 Home Care 937.6 794.3 18.0 975.2 -3.9 Others 41.4 96.5 -57.1 42.3 -2.1 Laundry Services 1299.3 955.5 36.0 1255.6 3.5 Total Capital Employed 5271.4 5311.4 -0.8 5122.2 2.9 Add : Unallocable Assets Less Liabilities 2787.8 1502.3 85.6 2628.3 6.1 Total Capital Employed in the Company 8059.2 6813.7 18.3 7750.6 4.0

(Source: Company, HDFC sec)

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Other Key Highlights / Developments: The company has indicated that it is confident of achieving double digit growth in Ujala Fabric whitener with implementation of new plans towards the brand in the

coming quarters. Henko was re-launched in the premium to mild premium detergent segment in India with a new proposition which performed extremely well for the company. Henko

Stain Champion and Henko Matic registered a growth of 39% each during the quarter. The brand is now available in all towns with over one lakh population. The company expects a strong growth momentum in brand to sustain in the coming quarters.

In the Mosquito repellant segment, the sales of Maxo coil stood flat, while liquids grew by 24% for the company. The innovation in liquid vaporizer with all new mix is likely to be launched in Q3.

The management expects 17-18% revenue growth in dishwashing segment to sustain in the coming quarters. It said that going ahead the key growth drivers would be square bars, which contributes just 30% of the current brand contribution for the company. The square bars would largely be sold in tier II and III towns, where the format has good acceptance.

In personal care segment, the management expects Margo to grow above 20% in the near to medium term. During the quarter, the company granted options for senior management under the employee stock option scheme (ESOS). The expenses pertaining to ESOS stood at

Rs. 60 mn during the quarter. For FY15, the expenses under ESOS would be Rs. 300 mn, which will reduce in the subsequent years, as per the management. The management said the gross margin for H2FY15 will better than H1 with drop in key input prices including palm oil and packaging cost. It further added that the

improvement in gross margins is likely to directly flow in the OPM, resulting in a better OPM in H2FY15. A&P spends would sustain at around 12% for FY15 and in the range of 11.5-12% in FY16.

Conclusion & Recommendation: JLL’s Q2FY15 results (Y-o-Y) were below our estimates on the profit front, while revenue growth was in line. Sharp margin contraction led by higher material cost, Ad spends & staff cost was disappointing. The inclusion of ESOP charge of Rs. 60 mn was a negative surprise, as it was unexpected, which impacted the profits significantly. However, lower interest cost, tax rates & higher other income supported the overall PAT growth. Reported net income without considering ESOP expenses of Rs. 60 mn stood at Rs. 312 mn, up 113% Y-o-Y, but still below our estimates. While JLL’s flagship brand Ujala fabric whitener (~30% of JLL’s consolidated revenues) reported subdued growth during the quarter (~6% Y-o-Y) and Maxo disappointed with 5% Y-o-Y growth, some of the other brands like Henko (Henko Stain Champion and Henko Matic), Margo, Exo (bar), Pril (liquid) reported strong growth, thus helping JLL to maintain its healthy revenue growth momentum. We feel JLL is on track to meet our revenue projections for FY15 & FY16. Hence we are keeping the same unchanged. Sales growth is likely to be driven by brand and geographical extension and aggressive marketing initiatives. The company expects the growth in Ujala to bounce back in the coming quarters through higher marketing & distribution investments for the brand and expects strong growth momentum to sustain in other brands.

While the sales growth is likely to remain healthy, we feel the company’s profitability is likely to be impacted over the next two years and would be below our expectations largely on the back of unexpected ESOP charge of Rs. 300 mn in FY15 (Rs. 60 mn charged in Q2FY15) & higher than expected input cost in H1FY15. While we expect the company to benefit from soft input prices in H2FY15, we feel a part of benefits in gross margins is likely to be invested to support the new launches and continued innovations in power brands. Further, we expect ESOP expense of Rs. 240 mn likely to be recognized over the next two quarters to more than offset the tailwinds of low input cost and suppress the margins in FY15. We would not treat ESOP expenses as extraordinary expenses. Though we expect the OPM to improve in FY16 due to reduction in ESOP charges (compared to FY15) & low input prices, we expect the tax expenses to rise in FY16, as the tax benefits from Henkel’s carry forward

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losses would expire in FY16 (we have assumed 16% effective tax rate in FY16). We are downgrading our operating profit & PAT estimates 21.8% & 27% respectively for FY15 and by 6.2% and 19% respectively for FY16. Accordingly revised EPS for FY15 & FY16 is estimated at Rs. 6.9 & Rs. 9.1 (Rs. 9.5 & Rs. 11.4 estimated earlier). Despite significant downgrade in earnings, we are assigning higher PE to the stock (27xFY16E EPS) on the back of overall re-rating in the FMCG sector (on expectations of a turnaround in the economic growth & improvement in spending power over the next few quarters), which gives a target of Rs. 247. The valuation is at a discount of 15-20% to other FMCG companies considering smaller business size and stiff competition in its categories from established peers like HUL & P&G (in detergents) & Godrej Consumer (in soaps & mosquito repellents segments). For better valuations, the company should scale up its business and improve its profitability (especially the operating performance, which has been weak and most of the growth in net profit has been supported by decline in interest cost, lower tax expense & other income). The stock offers limited upside from the current levels. For better returns and margin of safety, we feel investors could buy the stock on dips to Rs. 210-219 (23-24xFY16RE EPS) for our price target over the next quarter. Financial Estimations: (Consolidated)

(Rs. in Million) Particulars FY12 FY13 FY14 FY15 (OE) FY15 (RE) FY16 (OE) FY16 (RE) Net Sales 9126.2 11041.5 13183.94 15491.1 15491.1 18279.5 18279.5 Operating Profit 840.9 1296.7 1572.1 2060.3 1611.1 2504.3 2348.9 Adjusted PAT 445.8 196.5 837.2 1719.5 1254.8 2065.6 1672.6 EPS 2.5 1.1 4.6 9.5 6.9 11.4 9.1 OPM (%) 9.2 11.7 11.9 13.3 10.4 13.7 12.9 NPM (%) 4.9 1.8 6.4 11.1 8.1 11.3 9.2 PE 95.8 217.4 51.0 24.8 34.0 20.7 25.8

*OE = Original Estimates; RE = Revised Estimates (Source: Company, HDFC sec Estimates)

Analyst: Mehernosh K. Panthaki – IT, FMCG & Midcaps; Email ID: [email protected]

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office

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