Stock surges by 16% in recent times; positives priced in:
Jyothy Laboratories’ (JLL) stock price has seen a strong run-up of ~16% in the last 15 days in the wake of Henkel AG (Henkel) getting more time to exercise its option of acquiring upto 26% stake in the company. Henkel has got an extension to exercise the option before October 31, 2017. After the strong rally in the past few days, the stock is now trading at 28x its FY2019E earnings, which is higher than its historic valuations. Therefore, we advise investors to avoid any fresh buying in JLL and wait for the right opportunity to enter into the stock.
Option exercising period extended up to October 2017; Synergistic benefits could accrue if Henkel acquires stake in JLL:
JLL’s management has confirmed Henkel extending the period of exercising the option to acquire up to 26% stake in the company before October 31, 2017. Post the acquisition, Henkel might enhance its stake in the company through an open offer. This is likely to result in synergistic benefits for JLL in the form of better technology and portfolio enhancement (some of Henkel’s global products could be launched in India through JLL). This will improve JLL’s growth prospects in the long run.
Q4FY2017 result expectation – revenue growth to improve; higher input costs to put pressure on margins:
JLL’s Q3FY2017 performance was better than expected with low single-digit revenue growth and flat bottomline (as against our and street expectation of a decline in revenue as well as PAT) in the backdrop of the demonetisation shocker. For Q4FY2017, we expect JLL’s revenue growth to be better at 7% YoY (volume growth expected at low mid single digit). Gross margins and Operating Profit Margin (OPM) are expected to be lower on a YoY basis due to the surge in Raw Material prices. However, with the tax expenses expected to be lower on a YoY basis, the net profit is expected to grow at a double-digit rate.
Downgrade to Hold with PT under review:
With the recent surge in JLL’s stock price, the current valuation appears stretched at 28x FY2019E earnings. We don’t see any substantial upside in the JLL stock from the current level and therefore downgrade our rating from ‘Buy’ to ‘Hold’. The price target has been kept under review and will be revised post the announcement of Q4FY2017 results. We advise our investors to hold the stock and wait for a better entry point for any fresh buying.
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