ANALYSIS: 2 yrs on, Jyothy struggles to digest Henkel buy

Its been over two years since Jyothy Laboratories announced the acquisition of the local unit of German consumer goods major Henkel AG. Now Jyothy, familiar for its Ujala whitener, is riding on Henkel's brand to position itself in the mid and premium segment, especially in detergents.
Jyothy had announced acquisition of majority stake in Henkel India in 2011 and in June last year, it got board approval for the merger of Henkel India.
Henkel's key brands--Henko detergent and Pril dishwash liquid--have strong brand recall in South India, and even two years after acquiring the company, Jyothy hasn't been able to penetrate the Northern markets in a big way.
Its a similar case even with some of Jyothy's key brands like Exo dishwash bar and Ujala detergent.
Exo, for instance, has a 22 percent market share in the south, but elsewhere it has just 3-5 percent market share, according to Kotak Institutional Equities. Pril has 18 percent market share in liquids and 45 percent of its revenues come from southern markets alone. The dishwashing category as such derives 35-40 percent revenue from Southern India.
Jyothy has now begun addressing some of these issues.
For instance, Bhaumik Bhatia, analyst at IDBI Capital says, the company has launched new brand communication for Henko and Ujala, Henko will relaunched with new packaging and price positioning in the next few months and Ujala, which has a 22 percent market share and Rs 75 crore revenue in Kerala alone has been launched in Andhra Pradesh and Karnataka in June.
Similar steps are being taken for other brands like Margo bathing soap Fa deospray for women, where new commercials are being launched and Margo brand will be extended from just being an ayurvedic soap to facewash and glycerin soap among other variants, according to analysts.
As far as its Maxo insecticide is concerned, Jyothy Labs aims to focus on more profitable liquids and vapourisers. Its market share in liquids is just about 5 percent,  Bhatia says.
One common thing the company seems to be doing across brands is positioning itself as a mid-to-premium brand. Premium detergents, where Henko will fight with the likes of P&G's Ariel and HUL's Surf, is for instance a Rs 2,500 crore category.
Jyothy's plan to go premium may work in the long-term, given that products like Henko command high margin. But the increased marketing and promotional spends will put pressure on margins in the near-term.
Kotak Institutional Equities feels FY14 will be a year of increased aggression on sales but the full force of the combined entity will start reflecting on the financials only from FY15.
"We expect FY14 to be another year of modest EPS (in the context of valuation) as increased D&A (on account of the intangible/goodwill amortization) will remain a drag," the brokerage said.
Kotak has maintained an "add" rating on Jyothy Labs, but IDBI Capital has downgraded the stock to "hold" from "buy" citing the run-up in the stock since its fourth quarter results were announced.
Antique Stock Broking downgraded the stock to "sell" from "hold" on valuations.
"In our view, the best-case scenario, comprising of an EPS of Rs 9.3 during FY15, assuming a net sales CAGR of 27 percent in FY13-15 and an EBITDA margin of 14.6 percent in FY15 would be difficult in a scenario of demand slowdown and rising inflation," Antique's Abhijeet Kundu and Nupur Parik said.
With the recent rupee depreciation, input cost inflation is re-surfacing, the two analysts say.
Jyothy Labs shares closed marginally up at Rs 192 on NSE on Wednesday. In the last one year, the stock has declined near 14 percent, significantly underperforming the wider CNX FMCG index, which has gained close to 40 percent.