Jyothy Laboratories

Investors looking for a business with steady earnings growth and strong free cash flows can accumulate Jyothy Laboratories' stock, albeit on dips

   SMALL-CAP FMCG player Jyothy Laboratories has continued its streak of outperforming the broader market indices since August 2009. The stock has nearly tripled in value in the past one year against a 15% rise in the Sensex and a 34% appreciation in ET FMCG Index. The company's robust financial performance and its foray into new businesses are the major reasons for its superior performance on the bourses. Investors interested in companies in the small-cap space can consider this stock as a safe bet.

BUSINESS

The Kerala-based company, which has evolved from a single product proprietary firm to a multi-brand company, involved in the manufacturing and marketing of products in fabric care, mosquito repellant, surface cleaning, personal care and incense sticks.

   The company's flagship brand Ujala (fabric whitener) is enjoying a market leadership in its category. Over the years, the company has extended this brand to other product categories such as washing powder and stiffener. Its mosquito repellent brand Maxo has an all-India market share of 22%. Exo, its dishwashing product, has a 24% market share in Southern India and has been raising its market share across the country following its national roll-out in October 2009.

   The company has also forayed into laundry business by launching a laundry service through its 75% subsidiary Jyothy Fabricare Services (JFSL). The company expects net revenue of Rs 50 crore from this subsidiary this financial year.

   The company's most recent venture is the purchase of DEPA technology from DRDO (Defense Research & Development Organisation). This technology offers a repellant formulation that acts as a protection against all blood sucking insects and mosquitoes when applied. This product is slated for a launch in the second quarter of this fiscal and it will be marketed across India and other countries.

GROWTH DRIVERS

With an aim to increase pan-India presence of its products, the company has increased its spend on advertisements by almost 50% in the year ended March 2010. JFSL is planning to enter Hyderabad, Chennai and Pune and explore franchise route from FY12.

   The purchase of DEPA technology gives its access to Rs 90-crore outdoor mosquito repellant market, which it expects to touch Rs 200 crore in another two years. With the launch of its product, the company would be able to capture most of this market. It expects this business to contribute 4% to its top line.

FINANCIALS

It is a cash-rich company with sound financials. The net sales have grown at a compounded annual growth rate (CAGR) of 12.5% since FY06 to touch Rs 574 crore in the year ended FY10. The net profit jumped by over 11.6% to Rs 80 crore in the same period. To maintain its dividend pay out ratio of 42%, the company increased its dividend per share to Rs 4 from Rs 2 last year. But considering the increase in stock price, dividend yield has fallen from 2.9% to 1.8%.

   The contribution from fabricare, mosquito repellent, dishwashing products and other is 46%, 31%, 16% and 7% of the revenues, respectively. Brandwise, Ujala has shown a growth of 22.7%, Maxo has shown 28.6%, Exo has shown 50.8% in revenues in FY10. According to the management, JFSL will be able to break even by the end of FY10

VALUATIONS

The company is at present valued at slightly less than three times its revenues. It is trading at a price-to-earning (P/E) multiple of around 21.5. The stock seems to be fairly valued at the current levels. It's a right investment for long-term investors looking for a company with steady earnings growth and strong free cash flows.