Jyothy Laboratories: Q1 FY 2011 Results

Jyothy Laboratories was quoting at Rs. 175 in March 2010 when we thought it was a great pick in the FMCG space. (See Jyothy Laboratories: Best FMCG Buy). Our rationale was that Jyothy Laboratories was the cheapest stock in terms of valuation in the FMCG space. We liked that Jyothy Laboratories has a very small equity of 7.5 crore, is debt-free, with great selling products and good growth prospects. Since then, Jyothy Laboratories has sprinted to a high of Rs. 294 and is presently at Rs. 283.

The Q1 FY 2011 results gives us an opportunity to put Jyothy Laboratories through the grinder again to see if more juice is left even now.

Jyothy Laboratories reported good results in Q1 FY 2011. Jyothy Laboratories‘ Net profit was Rs 25.71 crores in the quarter ended June 2010 as against Rs 21.98 crores in the previous quarter ended June 2009, represetning an increase of 16.97%. Jyothy Laboratories‘ Sales was Rs 150.84 crores in the quarter ended June 2010 as against Rs 119.15 crores during the previous quarter ended June 2009, representing an increase of 26.60%.

On a sequential Q on Q basis, Jyothy Laboratories‘ results for Q1 FY 2011 were a bit subdued. Jyothy Laboratories‘ March 2010 sales turnover was higher at Rs. 195.44 crores while the Net Profit was also higher at Rs. 27.12 crores.

Jyothy Laboratories‘ Acquisition will boost EPS in FY 2011:

Jyothy Laboratories is on a growth trajectory. Jyothy Laboratories raised Rs 228 crores through a qualified institutional placement (QIP). The shares were issued by Jyothy Laboratories at Rs 282.6 per share and this has resulted in a dilution of 10% of the equity. Jyothy Laboratories is planning a couple of acquisitions by the end of the year. Jyothy Laboratories plans to buy two fabric care firms for Rs 250 crores and these acquisitions will be earnings per share (EPS) accretive.

Jyothy Laboratories‘ Deputy MD told CNBC-TV18 that the money has been raised by Jyothy Laboratories‘ to make two acquisitions in the fabric care segment. The total investment will be about Rs 240-250 crore. The businesses are in fabric care and Jyothy Laboratories hopes to be able to complete the deal by the December quarter.

Ullas Kamath, Deputy MD, Jyothy Laboratories, also said that if the acquisiitons are completed by Jyothy Laboratories in the December quarter, Jyothy Laboratories will get a top-line of businesses in the next three months, that is January to March quarter, of about Rs 75 to 100 crores. The total top-line of the businesses together will add about Rs 220-250 crores to Jyothy Laboratories‘ top-line.

The best part is that both businesses are profit making and both of them have good earnings before interest, tax, depreciation and amortization (EBITDA) margins. These are comparable with the kind of business Jyothy Laboratories is already in. Both businesses are more than 25 years old and the business is good in the market place and they are very strong.

Jyothy Laboratories‘ EPS will increase by the acquisition. Apart from the increase to Jyothy Laboratories‘ topline by about Rs 250 crores in FY11-12, Jyothy Laboratories will add a profit margin of Rs 20-25 crores to its bottomline.

Jyothy Laboratories‘ laundry business is also doing well. Jyothy Laboratories has invested Rs 30 crores in the laundry business in Bangalore. The laundry business is expected to break even (cash wise) in Bangalore by March 31, 2011 (the first year of operations). Jyothy Laboratories may consider expansion after that.

Jyothy Laboratories made it clear that its’ plans on expansion of the laundry business was dependent on how the profitability looks like before March 31, 2011. Jyothy Laboratories wants to first breakeven in terms of cash and only then go for expansion.

Of course, all the good news of the acquisition by Jyothy Laboratories has laready been priced in the share price of Jyothy Laboratories. The stock price rose from Rs. 175 in March 2010 to the CMP of Rs. 283 reflecting a spectacular rise of 62%.

Despite the steep increase in the share price, all the good things that attracted one to Jyothy Laboratories are still intact. Jyothy Laboratories offers a Return of Equity of about 20%. Jyothy Laboratories is virtually debt free (negligible Debt Equity Ratio of 0.02). Jyothy Laboratories Net Profit Margin is 11.65% while its’ 3 year CAGR in Profit is 12.79.

Jyothy Laboratories‘ PE at the CMP of Rs. 283 is about 28.9 based on the TTM EPS of FY 2010 of Rs. 9.56. The PE looks steep and obviously prices in the expected gains from the acquisition. However, given the strong market share that Jyothy Laboratories enjoys and its growth trajectory, it is still cheap compared to its peers especially if the medium to long-term horizon is considered.