Stock Review: JYOTHY Labs

The decision of Jyothy Labs to acquire a stake in Henkel India appears to be a smart move. Jyoti Labs is paying . 61 crore for a 15% stake, valuing the loss-making FMCG company at a market cap of . 407 crore. By acquiring a minority stake, it will gain an edge over other FMCG companies such as Emami, Godrej and Dabur which were also reported to be keen on buying out the German's parent's 51% stake in the company.

Henkel Germany owns a majority stake in Henkel India, along with Tamil Nadu Petro Products, which controls 16.6% of the equity. Jyothy Labs has bought the stake from TN Petro, which is financially strained.

Henkel India sells products under brands, like Henko, Neem, Fa, Pril, Margo, Mr White, Chek, Bref, Igora Royal, Strait Therapy, Glatt & Natural Styling, Osis and Loctite across laundry, personal and home care and industrial segments. It has not been able to generate profits, given the intense competition in its product categories. Its financials don't depict it to be a typical FMCG company. It has debt on its books with a debt-equity ratio of more than 1. For the calendar year 2010, the company reported a 7% drop in net sales of . 534 crore. It reported a loss of . 52 crore against a similar loss a year ago. Jyothy Labs interest in such a business stems from the fact that the two companies have many common products leading to synergies in branding and manufacturing. The major hurdle, which Jyothy now has to cross, is to acquire the 51% stake of Henkel Germany for it to meaningfully gain from its association with Henkel India. The bidding process for Henkel Germany's stake is already underway and is likely to be finalised by mid-April. With cash of . 210 crore in its books, along with a deleveraged balance sheet Jyothy Labs is well-equipped to participate and succeed in the bidding process. Even if it fails in the bid, Jyoti will still have a financial interest in the company's growth and may quite likely gain from it.