Jyothy Laboratories Ltd. Expansion to be the key driver January 08, 2014

Initiating Coverage Jyothy Laboratories Ltd. Expansion to be the key driver January 08, 2014 BUY CMP (`) Target (`) 194 244 Potential Upside Absolute Rating 26% BUY Market Info (as on January 08, 2014) BSE Sensex 20,729 Nifty S&P 6,174 Stock Detail BSE Group B BSE Code 532926 NSE Code JYOTHYLAB Bloomberg Code JYL IN Market Cap (`bn) 35.11 Free Float (%) 40% 52wk Hi/Lo 220.60 / 140 Avg. Daily Volume (NSE) 127,107 Face Value / Div. per share (`) 1.00 / 2.50 Shares Outstanding (mn) 166 Shareholding Pattern (in %) Promoters FIIs DII Others Investment Rationale Focus on seven core brands to pep up margins and gain market share in high growth segments Jyothy Laboratories Limited (JLL) plans to focus on its seven core brands, which it calls as its seven power brands. These are Ujala and Henko, (Fabric Care), Maxo (Household Insecticide), Exo and Pril (Utensil Care) and Margo and Fa (Personal Care). Management plans to divert its investments towards expanding and developing these brands. The planned focus strategy is expected to improve margins for JLL going ahead. On the other hand, JLL has reduced spending on brands such as Mr. White and Chek (Fabric Care) and Neem (Personal Care). This emphasizes the management s strategy shift from growth in every segment and geography to focus on sales and EBITDA growth. Also, company has plans for a pan-india rollout of its products from current South-only focus. Benefits from Henkel acquisition and business restructuring to accrue in the coming years JLL acquired Indian operations of German home care and laundry major Henkel AG in May, 2011. It invested around `7,830 mn to acquire 83.65% stake in BSE-listed and Chennai-based Henkel India Limited (Henkel). The acquisition helped JLL to gain access to Henkel s high-recall brands such as Fa, Henko, Margo and Pril along with other brands such as Mr. White, Chek and Neem. Margin rationalization resulted in savings of 2% in Stockist Margins and 2% in Retailer Margins. Management plans to plough back these savings into higher advertising expenses and promotional expenses. As a result of these efforts, we expect EBITDA margin to improve from 11.72% in FY13 to 13.60% in FY16E 63.69 16.04 9.79 10.48 Financial Snapshot (`mn) Y/E Mar FY13(A) FY14(E) FY15(E) FY16(E) Net Sales 11,060 13,324 16,846 21,461 EBITDA 1,297 1,745 2,241 2,919 PAT 196 774 1,355 2,150 EPS 1.22 4.80 8.40 13.34 ROE (%) 3% 12% 19% 26% ROCE (%) 7% 7% 11% 16% P/E 136.2 40.4 23.1 14.5 EV/EBITDA 20.5 17.9 14.2 11.0 Share Price Performance 130 125 120 115 110 105 100 95 90 85 Laundry business is at a nascent stage, presents huge opportunity going ahead JLL has been steadily expanding its laundry business which it runs under the subsidiary Jyothy Fabricare Services Ltd (JFSL). JFSL is 74.71% owned by JLL and offers laundry service to the retail and institutional segment. JFSL reported revenues of `446 mn in FY13. Considering the hugely under-penetrated nature of the market and huge scope for expansion with minimal Capex, we expect revenues from the segment to scale up to `2,252 mn by FY16E; CAGR of 72%. Currently, most of JSFL s revenues come from the institutional segment which caters to hotels, serviced apartments, paying guest accommodation, hostels and airlines. Recently, JLL launched its premium retail laundry care services called Fabric Spa. The service offers facility to wash clothes given by individuals and families at a cost of `90 per cloth. Valuation At the CMP of `194, JLL is trading at 14.5x its FY16E EPS of `13.34. This is at 21% discount to P/E multiple of JLL s FMCG peer companies and at 15% discount to Indian FMCG peer companies. This discount is justified considering that JLL is a relatively new player in categories other than its traditional ones (such as Ujala). We attach multiple of 18x to its FY16E EPS of `13.34 keeping in mind the discount that the stock merits. We initiate coverage on JLL with a BUY rating and target price of `244, implying 26% upside potential to the CMP of `194. 80 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Jyothy Lab BSE SENSEX Rel. Perf. 1Mth 3 Mths 6Mths 1Yr Jyothy (%) (1.8) 8.3 4.7 18.5 SENSEX (%) (3.0) 4.0 7.1 5.1 Analyst Aditya Anand Bapat +91-22- 6614 2692 adityab@geplcapital.com Institutional Research 1

JLL s 7 power brands at a glance Investment Rationale Focus on seven core brands to pep up margins and gain market share in high growth segments JLL plans to focus on its seven core brands, which it calls as its seven power brands. These are Ujala and Henko, (Fabric Care), Maxo (Household Insecticide), Exo and Pril (Utensil Care) and Margo and Fa (Personal Care). Management plans to divert its investments towards expanding and developing these brands. The planned focus strategy is expected to improve margins for JLL going ahead. On the other hand, JLL has reduced spending on brands such as Mr. White and Chek (Fabric Care) and Neem (Personal Care). This emphasizes the management s strategy shift from growth in every segment and geography to focus on sales and EBITDA growth. Also, company has plans for a pan-india rollout of its products from current South-only focus. Sr. No. Brand Name Type of Product Segment as per company Product Market Share (%) Product Sales (` mn) Market Size (` mn) Competitors 1 Ujala Liquid Blue Fabric Care 73% 3,650 5,000 2 Henko Washing Powder Fabric Care 4% 1,200 30,000 3 Maxo Mosquito Coil Household Insecticide 10% 900 9,000 4 Exo Dish Wash Bar Utensil Care 14% 2,520 18,000 5 Pril Dish Wash Liquid Utensil Care 18% 360 2,000 6 Margo Ayurvedic Soap Personal Care 9% 594 6,600 Robin Blue, Rin Perfect Shine Surf Excel, Ariel Oxy Blue, Rin Matic, Wheel Active Gold Good Knight, Mortein, All Out Vim, Nima Bartan Bar, Odopic, Pril Vim, Nima Bartan Bar, Odopic, Exo Medimix, Mysore Sandal Soap 7 Fa Women's Deodorant Personal Care 10% 1,520 15,200 Nivea, Dove, Lux Source: Company Annual Report, Web Sources, Institutional Research We take a look at each of these 7 power brands a little more closely: 1. UJALA This has been JLL s marquee brand for quite a long time. Ujala is a leading brand in the `5,000 mn liquid blues category with a 73% market share. Despite being market leader in the liquid blues category, JLL has not been complacent. Instead, it has recently revamped the advertisement campaign for Ujala and launched a new campaign with the tagline Safedi ke aage Ujala. Owing to its dominance in the market, JLL continues to price Ujala slightly higher than its competitor, Rin Fabric Whitener (HUL). The company has also revised stockist margin for Ujala from 8% to 6% while retailer margin has been revised from 10%-15% earlier to 10%. Institutional Research Initiating Coverage 2

2. HENKO JLL plans to position Henko washing powder in the premium washing powder category to take on brands such as Surf Excel, Ariel, Wheel Active, etc. For now, JLL has plans to restrict Ujala washing powder to Southern states in order to avoid competing with Henko. JLL recorded 18% - 20% growth in Henko in Q2FY14, which is a respectable number for a premium category washing powder. The company plans to re-launch the brand in the first couple of months of 2014 in order to increase awareness and improve brand positioning. 3. MAXO JLL s mosquito repellent is a relatively low margin product compared to some of its other brands such as Ujala, Henko, etc. In fact, it is the only brand among the power brands that has seen sluggish or negative growth. Management has stated that they have not invested too much in the Maxo brand so far and will ramp up spending over the next couple of quarters. 4. EXO Exo has been a challenger brand in the dishwashing segment. It challenged the supremacy of the then market leader by positioning itself as a dish-wash bar with Anti-bacterial properties along with cleanliness properties compared to the market leader s cleanliness tag. This instantly created awareness about Exo and it is currently the second largest dish-wash bar in South India. It also created a brand extension by way of Exo dish-wash liquid and Exo scrub. This was done in order to make a frontal attack on the market leader. From being a predominantly South Indian brand, JLL plans to take Exo pan- India over the next few months and is spending heavily on advertising of the brand. 5. PRIL This is another dish wash brand from the JLL stable. Recently, Dettol (Reckitt Benkiser) has launched its dish washing brand Dettol Kitchen which ate into market share of its rivals, PRIL (JLL) and VIM (HUL). However, JLL has stepped up its investment in the brand and has decided to double advertising spends on the brand in FY14. The liquid dish washing segment is worth `3 bn and growing at 40% per annum. 6. MARGO Margo occupies 10% market share in India s `6.6 bn herbal soap market. The largest player in this segment is Cholayil s Medimix. Earlier, Margo used to be advertised only in Southern and Eastern India; JLL now plans to advertise nationally. Margo is a differentiated, niche product and hence gets fairly insulated from competition in the regular soaps category. However, heavy advertising would be required to gain market share in this segment dominated by Medimix. 7. FA JLL launched women s deodorants and perfumed talc under the Fa brand. It was re-launched in May, a little late; considering that the peak season for Deodorants and Talcum Powders starts from mid-march. Hence, Fa lost out on the opportunity in the 2013 season. This brand is currently worth `150 mn which the JLL management aims to scale up to `1,000 mn in the next three years. India s deodorant market is highly under-penetrated and offers opportunity at all price points given the low consumption and low awareness. JLL pays 2% royalty on sales of Fa to Henkel, Germany. In order to take on competition in the women s deodorant segment, JLL has introduced smaller packets of Fa. Institutional Research Initiating Coverage 3

Benefits from Henkel acquisition and business restructuring to accrue in the coming years JLL acquired Indian operations of German home care and laundry major Henkel AG in May, 2011. It invested around `7,830 mn to acquire 83.65% stake in BSE-listed and Chennai-based Henkel India. Henkel was loss-making at the time of acquisition and JLL took debt of `5.4 bn for the acquisition. As a result of the debt, JLL s D/E ratio increased from 0.10 in FY11 to 0.92 in FY12. The acquisition helped JLL to gain access to Henkel s high-recall brands such as Fa, Henko, Margo and Pril along with other brands such as Mr. White, Chek and Neem. Post acquisition, JLL rebranded and re-launched Henkel s brands with new advertising campaigns and brand extensions. After Henkel acquisition, JLL revised channel margins across products to improve its gross margins. Channel Margin Rationalization Sr. No. Brand Stockist Margin Retailer Margin Old Revised Old Revised 1 Exo 6% - 8% 6% 8% - 15% 8% - 10% 2 Maxo 6% - 8% 6% 10% 10% 3 Ujala 8% 6% 10% - 14% 10% 4 Industry -- 4% - 5% -- 8% - 10% Source: Company Presentation, Institutional Research As can be seen from the table above, margin rationalization resulted in savings of 2% in Stockist Margins and 2% in Retailer Margins. Management plans to plough back these savings into higher advertising expenses and promotional expenses. From current advertising and promotional expenses of 7% - 8% of net sales, management plans to take it up to 10% of net sales in the next 2 3 years. Hence, the margin benefits of channel rationalization would be set off by increase in Advertising spends. As a result of these efforts, we expect EBITDA margin to improve from 11.72% in FY13 to 13.60% in FY16E. JLL has put in place a fresh field force of 200 sales persons. All manufacturing has been transferred to Jyothy s facilities; most of which are in tax free zones. Business turnaround plan Sr. No. 1 2 Business Turnaround plan Appoint a Special Task Force at Key positions including CEO, Marketing head and Supply Chain Change top management retain select middle managers handling brands and distribution Status Appointment of CEO and other key managers New Zonal Sales Managers & Category Heads Hired 3 Remove current advertising agencies Ujala, Maxo and Exo have new Ad Agencies 4 Increase retail prices across products appropriate to their positioning MRP corrections done in line with market 5 Remove all sales promotions and offers 6 Recruit a fresh field force of 200 sales persons 7 8 Focus on South & East based stockists / distributors in the first phase and increase their productivity based incentives Transfer all manufacturing to single low-cost contract manufacturer / Jyothy s tax free facilities 9 Re-launch brands with new creative and positioning in a phased manner Source: Company Presentation, Institutional Research Rationalized trade margins and sales promotions and plough back the same in Brand building Zonal Sales Managers and Area Managers hired, thereby frontline field force strengthened New Distribution Structure in place New Manufacturing strategy initiated Significant effort made in all brands having new creatives. Implementation of new strategy underway with more spends Institutional Research Initiating Coverage 4

Laundry business is at a nascent stage, presents huge opportunity going ahead JLL has been steadily expanding its laundry business which it runs under the subsidiary Jyothy Fabricare Services Ltd (JFSL). JFSL is 74.71% owned by JLL and offers laundry service to the retail and institutional segment. Laundry Business Laundry Business RAIL Retail Segment Institutional Segment Premium SVCS Economy SVCS Hotels Fabric Spa Snoways SVCS Apts Paying Guest Accommodation Hostels Airlines Laundry Business Snapshot Sr. No. Type of Laundry Business Volume Share (%) Realisation Share(%) 1 Institutional 10% 90% 2 Retail 90% 10% JFSL reported revenues of `446 mn in FY13. Considering the hugely under-penetrated nature of the market and huge scope for expansion with minimal Capex, we expect revenues from the segment to scale up to `2,252 mn by FY16E; CAGR of 72%. Currently, most of JSFL s revenues come from the institutional segment which caters to hotels, serviced apartments, paying guest accommodation, hostels and airlines. Some key institutional clients include Royal Orchid and ITC-Fortune hotels and airlines such as Lufthansa, Air France, Singapore Airlines and Jet Airways. It has got a trial project from Indian Railways for 12 trains' bedrolls, won tenders under the BOOT (build, own, operate and transfer) system for Mumbai Central worth `1,000 mn for 12 tons per day and for Southern Railways (Chennai) worth `920 mn for 10 tons per day, over a period of 15 years. Institutional Research Initiating Coverage 5

According to a KPMG study, the Indian Cleaning & Laundry market is over `52 bn and is growing at the rate of over 30% per annum. At present the laundry industry in India is like a drop in the ocean, the players are hopeful about it growing by leaps and bounds. The hope comes from the way urban lifestyle is shaping up and evolving. With nuclear families on a rise and no time on hand, more and more urbanites seem to prefer outsourcing laundry services rather than playing in the hands of dhobis and maids. The main advantage of the laundry business is that it requires low capital expenditure as the expenses are mainly incurred on staff and electricity. Also, since all required detergents are made in house, this leads to healthy gross margins of ~50%. Recently, JLL launched its premium retail laundry care services called Fabric Spa. The service offers facility to wash clothes given by individuals and families at a cost of `90 per cloth. The company also plans to offer monthly packages, with special discounts for elderly people and children. The cloth will be analyzed in an in-house laboratory by experts before being sent for wash. Fabric Spa is part of JFSL. The company has constructed a 60,000 square foot main service station at the Apparel Park in Bangalore, with a capacity to service 40,000 pieces of clothes a day. The initial investment in Fabric Spa is `350 mn. JFSL and its subsidiaries Sr. No. Company Percentage ownership directly or indirectly (March, 2013) Location(s) Y-o-Y Revenue Growth in FY13 1 Jyothy Fabricare Services Limited 74.71% 20% Subsidiaries: 2 Snoways Laundrers and Drycleaners Pvt. Ltd. 36.61% Bengaluru NA 3 Diamond Fabcare Private Limited 74.71% Delhi, Gurgaon, Faridabad and Ghaziabad (25)% 4 Akash Cleaners Private Limited 74.71% Mumbai 36% 5 Fab Clean & Care Private Limited 74.71% Pune 9% 6 Four Seasons Dry Cleaning Co. Private Limited 74.71% New Delhi (38)% Institutional Research Initiating Coverage 6

Valuation & outlook At the CMP of `194, JLL is trading at 14.5x its FY16E EPS of `13.34. This is at 21% discount to P/E multiple of JLL s FMCG peer companies and at 15% discount to Indian FMCG peer companies. This discount is justified considering that JLL is a relatively new player in categories other than its traditional ones (such as Ujala). Also, the FMCG sector is dominated by wellentrenched players such as ITC, HUL, P&G, GCPL, etc.; all of which are way ahead in terms of size and distribution. We retain 21% discount to the FMCG peer companies and 15% discount to Indian FMCG peers to account for the high advertising costs that the company has to incur, nascent stage of laundry business and also high competition in the sector. There could be positive triggers by way of 1) land bank sale announcement, 2) laundry business ramp-up, 3) lower crude oil prices. We attach multiple of 18x to its FY16E EPS of `13.34 keeping in mind the discount that the stock merits. We initiate coverage on JLL with a BUY rating and target price of `244, implying 26% upside potential to the CMP of `194. 1 year forward P/E Chart 400 350 300 250 200 150 100 50 - Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 NSE Price (Rs) 6x 26x 38x 60x Peer Valuation Sr. No. Company CMP (`) Mcap (`mn) EPS (`) P/E (x) P/BV (x) RoE (%) FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E 1 Jyothy Labs 194.00 31,285 4.80 8.40 13.34 40.44 23.09 14.55 5.32 4.65 4.00 12% 19% 26% 2 HUL 558.25 1,207,216 16.72 18.29 20.66 33.38 30.53 27.02 33.79 28.10 28.19 112% 100% 102% 3 Colgate Palmolive 1,339.00 182,095 37.35 43.46 50.38 35.85 30.81 26.58 32.83 29.38 27.07 97% 100% 104% 4 Godrej Consumer 835.00 284,151 23.79 29.71 36.73 35.10 28.11 22.74 7.35 6.23 5.31 23% 24% 25% 5 Marico 219.50 141,534 7.38 8.69 10.27 29.74 25.27 21.37 6.62 5.47 4.71 24% 25% 25% 6 Dabur India 174.05 303,352 5.29 6.33 7.44 32.88 27.52 23.41 11.37 9.21 7.59 38% 37% 35% 7 Emami 477.00 72,176 17.11 20.01 24.28 27.88 23.83 19.65 11.12 8.87 6.97 44% 41% 40% 8 ITC 316.85 2,503,685 11.13 13.19 15.43 28.46 24.02 20.54 9.51 8.45 7.94 36% 38% 41% AVERAGE (Excl. Jyothy) 31.90 27.16 23.04 16.08 13.67 12.54 Source: Company Data, Bloomberg, Instotutional Research Institutional Research Initiating Coverage 7

P/E Valuation CMP (`) 194 Current P/E 14.55 (CMP/FY16E EPS) Target EPS (`) 13.34 (FY16E) Target P/E (x) 18 Target Price (`) 244 Upside (%) 26% Discount to Indian peers 15% Discount to all peers 21% Just for confirmation, we have used DCF valuation to arrive at the intrinsic value. The intrinsic value using DCF of `256 per share is at a 5% premium to the target price that we have calculated using P/E. For our DCF calculation, we have applied weighted average cost of capital (WACC) of 11.16%. We use Terminal Growth Rate of 4.0% into perpetuity. DCF Valuation - 1 Particulars FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E FY23E Free Cash Flow 1,239 686 72 68 210 381 546 738 965 1,233 PV of Free Cash Flow 1,210 603 57 48 134 219 282 344 404 464 DCF Valuation - 2 Terminal Growth Rate (%) 4.00% WACC (%) 11.16% Total of PV of Free Cash Flow (` mn) 3,767 PV of Terminal (` mn) 47,567 Net PV (` mn) 51,333 Add: Cash (` mn) 463 Less: Debt (` mn) 5,518 Net Attributable EV (` mn) 46,279 No. of shares (mn) 181 Fair Value Per Share (`) 256 Premium/(Discount) to CMP (%) 32% Premium/(Discount) to target price (%) 5% Institutional Research Initiating Coverage 8

Financial overview Sales (` mn) & Sales Growth (%) 25,000 20,000 15,000 10,000 5,000-65% 5,981 6,264 5% 46% 9,133 11,060 21% 13,324 20% 16,846 26% 21,461 27% 70% 60% 50% 40% 30% 20% 10% 0% FY10 FY11 FY12 FY13 FY14E FY15E FY16E Net Sales (Rs. Mn.) Sales Growth (%) Over FY10 FY13, JLL s topline grew at 23% CAGR led by healthy growth in Dishwashing (42% CAGR) and Fabric Care (19% CAGR) segments. The Dishwashing segment was helped by EXO s dominance in South India while Fabric Care grew on the back of UJALA s dominance in the liquid blues segment. Going ahead, we expect sales to grow at 25% CAGR between FY13 FY16E helped by robust growth in Personal Care (47% CAGR) and continued dominance in Fabric Care (29% CAGR) and Dishwashing (29% CAGR) segments. After acquiring Henkel, JLL plans to take Henkel s brands pan-india; namely HENKO (Detergent), PRIL (Dishwashing), MARGO and FA (Personal Care). Segmental Sales Growth CAGR Category FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY10-FY13 FY13-FY16E Fabric Care 2,650 2,998 3,150 4,435 5,840 7,313 9,483 19% 29% Household Insecticide 1,785 1,459 1,477 1,690 1,883 2,147 2,447 (2)% 13% Dishwashing 944 1,140 1,633 2,701 3,647 4,668 5,835 42% 29% Personal Care - - 66 964 1,493 2,165 3,032 NA 47% Others 368 401 302 384 461 553 663 1% 20% Total 5,981 6,264 9,133 11,060 13,324 16,846 21,461 23% 25% Institutional Research Initiating Coverage 9

EBITDA & PAT Growth As seen in the chart below, JLL s EBITDA margin slipped between FY10 FY12 owing to increase in Advertising spends and increase in Raw Material Costs. However, the company has embarked on a restructuring exercise post acquisition of Henkel. It reduced channel margins, rationalized procurement and raised prices of some of its products. The effects of the rationalization exercise will be seen over the next couple of years as Henkel integrates fully with the company. However, we expect Advertising and Promotional Expenses to continue to inch upwards as JLL re-launches several of its products. Also, FMCG is a highly competitive field and hence continuous and effective advertising of products is a must. EBITDA Trend 3,500 3,000 15.35% 2,919 16% 15% 2,500 2,000 1,500 1,000 918 12.66% 793 844 11.72% 1,297 13.10% 13.30% 13.60% 1,745 2,241 14% 13% 12% 11% 10% 500 9.24% 9% - 8% FY10 FY11 FY12 FY13 FY14E FY15E FY16E EBITDA (Rs. M n.) EBITDA M argin (%) Advertising & Promotion Expenses 2,500 10.30% 11% 11% 2,000 1,500 1,000 500 389 8.87% 556 7.61% 695 8.64% 955 9.00% 1,199 9.40% 1,584 2,210 10% 10% 9% 9% 8% 8% 7% - 6.51% 7% 6% FY10 FY11 FY12 FY13 FY14E FY15E FY16E Advertising & Promotion Expenses (Rs. Mn.) as % of Net Sales Institutional Research Initiating Coverage 10

We expect Interest costs to decline over FY14E FY16E as the management has started taking steps towards reducing its debt burden. Also we have assumed zero tax over FY14E FY16E due to accumulated losses at Henkel. Due to both these factors, we expect PAT Margin to improve to 10.02% in FY16E from 5.81% in FY13 (excluding exceptional items). PAT Trend 2,500 2,000 12.43% 10.98% 2,150 13% 12% 11% 1,500 1,355 10.02% 10% 9% 1,000 500-743 688 446 4.88% 5.66% 196 774 5.81% 8.04% 8% 7% 6% 5% 4% FY10 FY11 FY12 FY13 FY14E FY15E FY16E PAT after Minority Interest (Rs. Mn.) PAT Margin (%) Interest Cost 800 700 682 641 600 520 500 400 300 200 238 403 100-17 20 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Interest Cost (Rs. Mn.) Institutional Research Initiating Coverage 11

Balance Sheet Overview JLL accumulated debt of `5.37 bn in FY12 in order to acquire Henkel. As per the company s Annual Report, the loan was taken at interest rate of 11.25% p.a. Due to the debt, JLL s D/E ratio swelled from 0.1 in FY11 to 0.92 in FY12 reducing slightly to 0.86 in FY13. The management recently raised `2.63 bn through preferential allotment to promoter group company, Sahyadri Agencies Limited (Sahyadri). The company sold 15 mn shares at `175.15/share to Sahyadri. Post allotment, paid up equity share capital of JLL has increased to `181 mn from `166 mn. With this the promoter holding has gone up to 66.7% from 63.69%. In November, 2013 JLL had raised `4 bn of Negotiable Certificate of Deposits (NCoDs) coupon payable after three years. These transactions will leave the company with considerable cash which it plans to utilize for organic and inorganic growth going ahead. Debt Trend 6,000 5,000 4,000 3,000 5,616 0.92 5,518 0.86 4,736 0.72 3,583 2,872 1.00 0.90 0.80 0.70 0.60 0.50 2,000 1,000-130 0.03 661 0.10 0.47 0.33 0.40 0.30 0.20 0.10 0.00 FY10 FY11 FY12 FY13 FY14E FY15E FY16E Total Debt (Rs. M n.) D/E Ratio (x) Due to steps taken by company for organizational restructuring, we expect working capital cycle to improve greatly. We expect Creditor Days to increase from 88 in FY13 to 100 in FY16E as JLL possesses greater bargaining power among distributors and stockists. Also, we expect inventory days to come down to 86 in FY16E from 108 in FY13 as JLL undertakes massive advertising campaigns and pushes products aggressively. Working Capital Cycle Particulars FY10 FY11 FY12 FY13 FY14E FY15E FY16E Debtor days 43 61 32 27 27 24 25 Creditor days 53 41 82 88 88 93 100 Inventory days 84 79 89 108 90 88 86 Working Capital days 73 99 39 46 29 19 11 Institutional Research Initiating Coverage 12

Cash Flow Generation We expect JLL to improve its cash flows due to steps taken to rein in the working capital cycle. Operating Cash flows are expected to improve as creditor days improve due to improving bargaining power with stockists and distributors. Compared to previous years, the company does not have huge capex plans as it has already rationalized Henkel s facilities and improved utilization levels. JLL plans to significantly bring down its debt over the next 2 3 years. Cash Flows 6,000 4,000 2,000 1,224 2,796 662 463 478 442 792 - (2,000) (4,000) (6,000) (8,000) FY10 FY11 FY12 FY13 FY14E FY15E FY16E Operating Cash Flow Financing Cash Flow Investing Cash Flow Total Cash as per Balance Sheet Institutional Research Initiating Coverage 13

Company Background Jyothy Laboratories Limited (JLL) is a Mumbai-based FMCG company founded in 1983. The company began as a proprietary concern selling a single product in South India and has now become a multi-brand, multi-product company selling several products across different categories. Its most significant product was Ujala liquid fabric whitener, a category in which it unseated the market leader; Robin Liquid Blue. JLL Business Divisions JLL Business Divisions Fabric Care Household Insecticide Utensil Cleaners Fragrances Personal Care Fabric Care Services Ujala Supreme Maxo A Grade Coils Exo Dish Wash Bar Maya Jeeva Naturals JFSL Ujala Washing Powder Maxo Aerosol Exo Dish Wash Liquid fabricspa busy easy Stiff & Shine Maxo A Grade Liquid Exo Safai fabricspa Ujala Techno Bright Detergent JFSL rentals Source: Company Website, Institutional Research Key people Sr. No. Name Designation 1 M.P. Ramchandran Founder, Chairman & Managing Director 2 K. Ullas Kamath Joint Managing Director 3 S. Raghunandan Whole-time Director & CEO 4 M.R. Jyothy Executive Director & Marketing Head 5 M.L. Bansal CFO & Company Secretary Source: Company Annual Report, Institutional Research Key Risks 1. Increase in competitive pressure from larger and better entrenched players such as HUL, ITC, Dabur, etc. 2. A significant increase in crude oil prices will affect JLL s margins as it is dependent on the same as Raw Materials. Institutional Research Initiating Coverage 14

Income Statement Y/E Mar (`mn) FY12(A) FY13(A) FY14(E) FY15(E) FY16(E) Total net revenues 9,133 11,060 13,324 16,846 21,461 COGS 5,030 5,844 6,928 8,760 10,945 Gross Profit 4,103 5,216 6,395 8,086 10,516 Employee Cost 1,137 1,305 1,586 2,005 2,554 Advertising, Sales & Promotion Expenses 695 955 1,199 1,584 2,210 Other Expenditure 1,427 1,659 1,865 2,257 2,833 EBITDA 844 1,297 1,745 2,241 2,919 EBITDA Margin (%) 9% 12% 13% 13% 14% Depreciation 247 224 433 485 550 Other Income 55 12 67 84 150 Interest (Net) 69 643 641 520 403 PBT 583 442 738 1,320 2,115 PBT Margin (%) 6% 4% 6% 8% 10% Tax 199 (149) 0 0 0 Minority Interest 62 35 35 35 35 PAT after Min. Int. 446 626 774 1,355 2,150 Extraordinary /exceptional 0 430 0 0 0 PAT 446 196 774 1,355 2,150 Key Ratio Y/E Mar (`mn) FY12(A) FY13(A) FY14(E) FY15(E) FY16(E) Per Share Ratios Fully diluted E P S 2.76 1.22 4.80 8.40 13.34 Book Value 76 79 36 42 48 Dividend 2.50 2.50 4.00 5.00 6.50 Valuation Ratio P/E 29.03 136.25 40.44 23.09 14.55 P/BV 1.06 2.10 5.32 4.65 4.00 EV/EBITDA 15.84 20.52 17.92 14.17 11.00 EV/Sales 1.46 2.41 2.35 1.88 1.50 Growth Ratios Sales Growth 46% 21% 20% 26% 27% EBITDA Growth 6% 54% 35% 28% 30% Net Profit Growth (35)% (56)% 294% 75% 59% EPS Growth (35)% (56)% 294% 75% 59% Margins Gross Margin 45% 47% 48% 48% 49% EBITDA Margin 9% 12% 13% 13% 14% PAT Margin 5% 2% 6% 8% 10% Return ratios RoCE 4% 7% 7% 11% 16% RoE 7% 3% 12% 19% 26% Turnover ratios (days) Debtors ( Days) 32 27 27 24 25 Creditors ( Days) 82 88 88 93 100 Inventory (Days) 89 108 90 88 86 Working capital days 39 46 29 19 11 Solvency Ratios Total Debt/Equity 0.92 0.86 0.72 0.47 0.33 Interest coverage 2.51 1.57 2.05 3.38 5.87 Balance Sheet Y/E Mar (`mn) FY12(A) FY13(A) FY14(E) FY15(E) FY16(E) Equity capital 81 714 181 181 181 Reserves & Surplus 6,044 5,671 6,426 7,369 8,596 Net worth 6,124 6,386 6,607 7,551 8,777 Minority interest 67 49 49 49 49 Net Deffered tax liab. 161 9 170 170 170 Total debt 5,616 5,518 4,736 3,583 2,872 Total Liabilities 11,968 11,961 11,562 11,352 11,867 Net block 10,303 10,624 10,532 10,757 10,917 Capital WIP 31 73 0 0 0 Total fixed assets 10,334 10,697 10,532 10,757 10,917 Investments 15 15 15 15 15 Other Non-Curr.Assets 19 16 16 16 16 Current Assets 3,826 4,465 4,690 5,120 6,816 Inventories 1,220 1,722 1,708 2,112 2,579 Debtors 807 808 986 1,108 1,470 Cash & bank 662 463 478 442 792 Loans & advances 1,094 1,423 1,460 1,385 1,881 Other Current Assets 43 49 58 74 94 Current Liab. & Prov. 2,225 3,231 3,692 4,555 5,896 Creditors 1,855 2,362 2,792 3,721 5,080 Provisions 370 869 900 834 816 Total Assets 11,968 11,961 11,562 11,352 11,867 Cash Flow Y/E Mar (`mn) FY12(A) FY13(A) FY14(E) FY15(E) FY16(E) PBT 583 12 738 1,320 2,115 Add: Depreciation 247 224 433 485 550 Add: Interest expense 238 682 641 520 403 Others (183) 407 35 18 (325) Change in Working cap. 589 (877) 281 332 (24) Taxes paid (228) (171) 232 71 71 CF from operations 1,246 278 2,360 2,746 2,791 Change in fixed assets (247) (279) (127) (250) (250) Others (5,905) (6) 67 84 150 CF from investing acti. (6,151) (285) (60) (166) (100) Change in debt 4,339 599 (782) (1,153) (711) Changes in Equity 500 17 (533) 0 0 Interest paid (238) (622) (641) (520) (403) Dividends (469) (234) (755) (943) (1,226) CF from financing acti. 4,132 (239) (2,711) (2,616) (2,341) Cash Generated (773) (246) (412) (36) 350 Opening cash 1,103 439 463 478 442 Closing cash 662 463 478 442 792 Institutional Research Initiating Coverage 15

NOTES Recommendation Rationale Recommendation Expected Absolute Return (%) over 12 months BUY >20% ACCUMULATE <20% and >10% NEUTRAL <-10% and <10% REDUCE >-10% and <-20% SELL >-20% Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for stock and our recommendation. 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