Jyothy Labs

It is FMCG makers which can deliver strong volume growth that have been outperformers in the stock market in recent months. That's why Indian players such as Marico, Dabur India and Godrej Consumer have seen a sharp expansion in their PE multiple to 25-30 times over the past year.

It is in this context that mid-sized FMCG company Jyothy Labs appears to be a good investment proposition. A value-for-money positioning for all its brands, extensive rural market presence and largely volume-driven growth suggest that recent buoyancy in the company's sales could be sustained. At the current market price of Rs 158, the stock is among the cheapest FMCG plays trading at 16 times its trailing 12-month earnings.

From being heavily dependent on just one brand, Ujala fabric whitener five years ago, Jyothy Labs has managed to broad-base its portfolio, adding Maxo mosquito repellants (36 per cent of 2008-09 revenues), Exo dishwash products (17 per cent) and a few smaller brands such as Jeeva soap and Ujala washing powder (10 per cent contribution).

Improving growth

After delivering sluggish numbers in the maiden year after its listing, Jyothy Labs has managed to post superior growth over the past year and a half. It managed a 27 per cent growth in adjusted sales and profits in the curtailed financial year ended March 2009 (the company reported numbers for 9 months due to a change in accounting year). This has been followed by a 34 per cent expansion in revenues and 56 per cent net profits growth in the first half of this year.

Over the past three years, the company has more than doubled its gross block to Rs 228 crore, without taking recourse to equity raising (the IPO in 2007 was an offer for sale by PE investors) or adding debt to the balance-sheet.

Gaining share

Jyothy Labs' brands increased their market share, even in the hotly competed segments of the FMCG business. While the flagship brand, Ujala fabric whitener has seen its market share climb from 68.5 per cent to 73.5 per cent between 2006 and 2009, Maxo mosquito repellant has seen shares rise from 19 to 22.8 per cent. Both these categories feature deep-pocketed competitors such as Hindustan Unilever, Godrej and Reckitt Benckiser. The company's expanding distribution presence in the South has also helped its Exo dishwash products double their South India market share from 11.7 to 23.8 per cent over the same period.

While Jyothy Labs' overall margin profile is lower than that of larger FMCG peers such as Dabur India or Godrej Consumer, it has managed to keep its adspend to sales ratio in the moderate 8-9 per cent range over the past three years, even while most other players saw a steep escalation in these spends to 12-13 per cent of their sales.

The company expects to keep adspend within this range, expanding market share mainly through investments in bettering its distribution reach.

Shift to value

The accelerated growth for Jyothy Labs is in line with the growth momentum witnessed by several smaller and mid-sized FMCG companies in this period. Mass market FMCG brands — whether in laundry, soaps or smaller categories — have seen strong growth momentum over the past year, helped by two factors.

One, the combination of upbeat farm product prices, higher support prices and better rural credit have helped keep rural and semi-urban demand for products quite strong, despite an erratic monsoon.

Jyothy Labs, with 60 per cent of its revenues originating from rural areas and an expanding distribution presence outside of urban India, has been a beneficiary of this trend. Two, the inflationary spiral of 2007-08 has prompted a consumer shift towards value offerings, helping regional and mid-sized players which have kept product prices under check.

With Jyothy Labs making almost no changes to its priceline over the past year, it has witnessed healthy volume-driven growth. In fact, packaging materials and plastics make up a chunk of raw material costs for the company and prices for these remain well below 2008 peaks.

The lag between commodity price corrections and their actual impact on costs and the three-four month raw material inventory held by the company may shield its margins from the increases in crude oil prices for the next couple of quarters.

The fact that the company has refrained from selling price increases for much of the past two years also lends it the flexibility to increase prices, if absolutely necessary, over the next year or two. A recent foray into laundry services, at a minimal investment may also lift overall margins, if it clicks.

via BL