Debt cleansing

The manufacturer of well-known fabric whitener brand Ujala is not seeing bright days. As consumption slows down, Jyothy Labs’ other products such as Henko and Maxo are also seeing weaker sales. That coupled with rise in unorganised players in household insecticide is playing spoilsport for the company. Investor sentiment has been hit and that’s clearly visible in the stock price, which fell from Rs.218 in December 2018 to hit a 52-week low of Rs.138 in September 2019. But with the overall market rebounding post the corporate tax cut, the FMCG company has also gained 20%.

Taking advantage of the pullback, promoter entity Sahyadri Agencies, led by founder MP Ramachandran, has sold shares worth Rs.2.68 billion in early November. According to the management, this move was taken to reduce debt due to pledging of shares. “Now, only 6% of the promoter’s stake will be pledged, and the rest will be paid off with this transaction. Post this transaction, promoters stake declined from 67.1% to 63%,” joint managing director Ullas Kamath told ET NOW and added that the company and promoters will be debt-free by March 2021.

While the promoter's bid to reduce debt is a positive step, the below-par results and weak earnings prospects are not exciting investors. In Q2FY20, revenue grew 8.5% to Rs.4.64 billion, driven by fabric care and dishwashing segment. Whereas Ebitda margin was flat at 17% due to increase in advertisement and promotion spends.

Analysts at Motilal Oswal Securities note that “lower-than-expected tax rate guidance has led to a marginal increase in EPS forecasts. The pace of earnings growth at 18% CAGR between FY19-21 is moderate for a company, which is much smaller in terms of size compared to its mid-cap peers.” They also feel that the valuation of 22x FY21 earnings provides hardly any upside, to their price target of Rs.170.

Mutual funds, however, are not too pessimistic. Since December 2018, they have increased their stake from 6.58% to 8.21%. Over the past three quarters, Franklin Templeton MF and Mirae Asset MF increased their holding from 2.27% and 1.40% to 4.60% and 1.94%, respectively. 

Foreign portfolio investors are staying put as well and their stake has marginally reduced from 15.85% to 15.73%. Aberdeen Global-Asian Smaller Companies Fund has increased its stake from 1.65% to 1.85%, and Emblem FII’s stake has remained unchanged at 1.66%.