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October 22, 2013

Index Stock Update >> Wipro Stock Update >> Yes Bank Stock Update >> Jyothy Laboratories

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Wipro
Stock Update

Reco: Buy

Upgraded to Buy with price target of Rs580

Company details Price target: Market cap: 52 week high/low: NSE volume: (no. of shares) BSE code: NSE code: Sharekhan code: Free float: (no. of shares) Rs580 Rs126,927 cr Rs520/299 22.2 lakh 507685 WIPRO WIPRO 65.3 cr

CMP: Rs515

Result highlights Revenue growth in line with expectations, posts highest growth in last seven quarters: Though Wipro continues to lag peers in terms of the revenue growth, for the quarter, it delivered its highest sequential growth in the last seven preceding quarters. After reporting tepid 0.9% compounded quarterly growth rate (CQGR) in the last seven sequential quarters, Wipros revenue growth for Q2FY2014 was a decent 2.7% quarter on quarter (QoQ) to $1,631 million, 3.2% on a constant currency basis (in line with our expectations of $1,628 million). The product business also reported a strong growth of 14.8% QoQ to Rs937.4 crore, though on a lower base (down 24% QoQ in Q1FY2014). In the rupee terms, the revenues were up by 10.7% QoQ to Rs10,772.7 crore. Margin ahead of expectations, net income beats estimates: For the quarter, led by the currency tail winds coupled with rationalisation of headcounts (a net reduction of 65 employees) and operational efficiency (utilisation excluding trainees improved by 100 basis points to 74.3%), the earnings before interest and tax (EBIT) margin of the information technology (IT) services improved by 250 basis points QoQ to 22.5% ahead of our expectations of 19.7%. The net income for the quarter was higher by 19% QoQ to Rs1,942 crore ahead of our estimate of Rs1,866.9 million. Management commentary reflects improved business visibility: In line with the improvement in the global economy (especially in the US and some pockets
Results (IT services, IFRS) Rs cr Q2FY14 10,772.7 7,420.7 3,352.0 1,109.8 2,242.2 275.6 2,517.8 575.4 1,942.4 10.3 1,932.1 492.4 7.9 31.1 20.8 17.9 22.9 Q2FY13 9,220.3 6,395.8 2,824.5 1,089.8 1,734.7 239.5 1,974.2 463.7 1,510.5 6.1 1,504.4 492.4 6.1 30.6 18.8 16.3 23.5 Q1FY14 9,729.4 6,721.7 3,007.7 1,237.5 1,770.2 286.6 2,056.8 425.1 1,631.7 8.4 1,623.3 492.4 6.6 30.9 18.2 16.7 20.7 YoY % 16.8 16.0 18.7 1.8 29.3 15.1 27.5 24.1 28.6 68.9 28.4 QoQ % 10.7 10.4 11.4 -10.3 26.7 -3.8 22.4 35.4 19.0 22.6 19.0

Shareholding pattern

Public & Others 6%

Foreign 12% Institutions 5% Non-promoter corporate 4%

Promoters 73%

Price chart
550 500 450 400 350 300 Jan-13 Oct-12 Jul-13 Apr-13 Oct-13

Particulars Net sales Direct costs Gross profit SG&A EBIT Net other income PBT Tax Provision PAT Minority interest Net profit Equity capital (FV Rs2/-) EPS (Rs) Margin (%) GPM EBIT margins NPM Tax rate

Price performance (%) Absolute Relative to Sensex 1m 6.5 3.3 3m 29.3 24.3 6m 12m 39.1 24.9 67.9 47.6

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October 22, 2013

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of European regions), Wipros management expects a surge in the confidence level of the clients. The positive outlook of the management is reflected in the decent guidance for Q3FY2014 (1.8-3.6%), which is almost at the same level with the guidance given out for Q2FY2014 (2-4%), despite Q3FY2014 being a seasonally weak quarter due to furloughs and lower billing days. The company continues to see the USA as a primary growth driver. Nevertheless, there are some green shoots of improvement in the European geography as well led by a strong traction seen in the UK. The company added nine new clients in the European geography during the quarter. The company has announced two large multimillion dollar deals during the quarter, one from a leading bank in the US and one in the knowledge process outsourcing (KPO) service line. The company expects the discretionary spending to improve especially in the area of capital markets (investment banking). The management expects the momentum in the discretionary spending to continue. The company also maintained that it is seeing improved deal closures overall on a sequential basis and the total contract value (TCV) of the deal pipeline is significantly better than in the previous quarter. The companys increasing focus on driving the nonlinearity is reflected from the fact that its fixed price project (FPP) component has increased by 240 basis points from 45.8% in Q2FY2013 to 48.2% in the last quarter. Valuationimproving earnings predictability, upgraded to Buy: After several quarters of earnings disappointments, Wipros performance for Q2FY2014 has seen a marked improvement with a decent revenue growth, an impressive margin performance and an increase in the deal wins (with an improvement in the success ratio). More importantly, a confident management commentary led by a conducive operating environment lends support to the earnings predictability for the coming quarters. We have reset

our currency estimates to Rs61 and Rs62 for FY2014E and FY2015E respectively and upgraded our earnings estimates. At the current market price (CMP) of Rs515, the stock trades at 16.4x and 14x FY2014 and FY2015 earnings estimates. Given the improvement in the earnings predictability (estimate earnings compounded annual growth rate [CAGR] of 20% over FY2013-15E) and undemanding valuation of 14x FY2015E, we have upgraded our rating on Wipro from Hold to Buy with a revised price target of Rs580. Other result highlights The cash and cash equivalents (including investments available for sale) stood at Rs15,648 crore for the quarter as against Rs15,331 crore for the previous quarter ended June 2013. The client addition during the quarter has been good. The company added 45 clients in its IT services business during the quarter against 28 added in the preceding quarter. The number of active clients has gone down marginally by 4 clients to 942. This is the second successive quarter of reduction in the active client base of the company (in the preceding quarter the active clients reduced by 32). The decline in the number of active clients is because of some clients going below the threshold limit of being counted as an active client because of the depreciating rupee. The companys overall workforce has reduced by 65 employees to 147,216. The management expects the employee addition to be lumpy in nature going ahead due to its focus on driving non-linearity of the business. The company continues to honour its commitments for fresher intake for FY2014, while the company will take in laterals as and when needed. The companys voluntary attrition rate has gone up marginally by 30 basis points to 13.5% during the quarter. While utilisation (gross) has spiked by 140 basis points to 66.1% for the quarter gone by. On a net basis, the utilisation has increased by 100 basis points 74.3% for the quarter. The overall hedge position of the company stands at $1.7 billion against hedges worth $1.9 billion in the previous quarter.

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October 22, 2013

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Operating matrix Particulars IT Revenues ($ mn) Geographic mix (%) Americas in $ mn Europe in $ mn India & Middle East in $ mn APAC & others in $ mn Service offering (%) Tech infra. services in $ mn Analytics & infm. mgmt. in $ mn Business application services in $ mn BPO in $ mn Product engg. in $ mn ADM in $ mn R&D business in $ mn Consulting in $ mn Industry verticals (%) Global media & telecom in $ mn Finance solutions in $ mn Manufacturing & hi-tech in $ mn Healthcare, life sci. & serv. in $ mn Retail & transportation in $ mn Energy & utilities in $ mn Client contribution (%) Top client in $ mn Top 5 clients in $ mn Top 10 clients in $ mn Others in $ mn 3.8 62.0 13.9 226.7 22.8 371.9 77.2 1259.2 3.5 53.9 13.0 200.3 22.3 343.6 77.7 1197.1 3.7 58.8 13.7 217.6 22.5 357.4 77.5 1230.9
Source: Company and Sharekhan Research

Q2FY14 1631.1 49.8 812.3 28.9 471.4 8.3 135.4 13.0 212.0 24.2 394.7 7.4 120.7 31.9 520.3 8.6 140.3 7.6 124.0 20.3 331.1 10.6 172.9 2.5 40.8 13.9 226.7 26.4 430.6 19.0 309.9 10.1 164.7 14.8 241.4 15.8 257.7

Q2FY13 Q1FY14 YoY % 1540.7 51.5 793.5 28.2 434.5 8.6 132.5 11.7 180.3 23.2 357.4 7.1 109.4 30.7 473.0 8.7 134.0 8.2 126.3 22.1 340.5 11.6 178.7 2.4 37.0 14.4 221.9 27.0 416.0 19.0 292.7 9.5 146.4 15.0 231.1 15.1 232.6 1588.3 49.7 789.4 29.0 460.6 8.8 139.8 12.5 198.5 24.2 384.4 7.5 119.1 31.3 497.1 8.8 139.8 7.5 119.1 20.7 328.8 10.2 162.0 2.5 39.7 13.6 216.0 26.5 420.9 19.1 303.4 9.8 155.7 15.1 239.8 15.9 252.5 14.9 13.2 8.2 5.2 10.8 4.5 12.6 5.9 3.5 2.2 10.3 -3.3 -2.8 -1.9 4.7 10.0 10.3 10.4 17.6 2.2 8.5 5.9 2.4

QoQ % 2.7 2.9 2.3 -3.1 6.8

Remarks The company witnessed a broad-based growth across geographies barring India and Middle East, which declined by 3% QoQ

2.7 1.3 4.7 0.4 4.1 0.7 6.7 2.7

In line with the positive commentary on the discretionary services, the company saw its business application services grow by 4.7% while the R&D and consulting services grew by 6.7% and 2.7% QoQ respectively

5.0 2.3 2.2 5.8 0.7 2.0

The company witnessed a broad-based growth in all its verticals Growth was led by the healthcare, and media and telecommunications segments, which grew by 6.4% and 5.6% in a constant currency basis sequentially

5.5 4.2 4.1 2.3

The company witnessed broad-based growth in all its client brackets for the second consecutive quarter

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October 22, 2013

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Valuations Particulars Net sales (Rs cr) EBIT margins (%) Net profit (Rs cr) EPS (Rs) Y-o-Y change (%) PER (x) Price/BV (x) EV/EBIDTA(x) Dividend yield (%) RoCE (%) RoE (%) 24.2 5.2 19.0 1.2 15.7 18.4 FY12 31,874.7 17.8 5,232.5 21.2 FY13 37,425.6 18.0 6,136.2 24.9 17.3 20.7 4.9 15.7 1.3 18.8 21.7 FY14E 43,966.9 19.2 7,723.5 31.4 25.9 16.4 4.2 15.2 1.4 21.0 23.5 FY15E 50,217.2 19.6 8,851.6 35.9 14.6 14.3 3.6 12.8 1.5 21.5 23.3

One-year forward PE band

1200.0 1000.0 800.0 600.0 400.0 200.0 0.0 Mar-04 Mar-11 Jul-06 Feb-07 May-05 May-12 Jun-09 Jan-10 Aug-10 Sep-07 Dec-05 Nov-08 Dec-12 Oct-04 Apr-08 Oct-11 Jul-13
30x 25x 21x 17x 13x 10x 7x

Source: Company & Sharekhan Research

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

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October 22, 2013

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Yes Bank
Stock Update

Reco: Buy

Price target revised to Rs422

Company details Price target: Market cap: 52 week high/low: NSE volume: (no. of shares) BSE code: NSE code: Sharekhan code: Free float: (no. of shares) Rs422 Rs13,411 cr Rs547/216 83.9 lakh 532648 YESBANK YESBANK 26.8 cr

CMP: Rs372

Result highlights Yes Bank reported a net profit of Rs371.1 crore (up 21.2% year on year [YoY]) in Q2FY2014, which was higher than our estimate. During the quarter, the bank had a one-off mark-to-market (MTM) gain of Rs111.6 crore incurred on interest rate swap, which helped it to absorb the MTM losses on the available-for-sale (AFS)/held-for-trading (HFT) investments. The net interest income (NII) growth was very much in line with our estimate as it grew by 28.2% YoY. Despite a 25-basis-point rise in the base rate, the net interest margin (NIM) declined by 10 basis points quarter on quarter (QoQ) to 2.9% largely contributed by a rise in the cost of funds (up 20 basis points QoQ). The growth in the customer assets lagged the industry rate as it grew by 12.7% YoY. However, the deposits growth remained strong as it grew by 29.2% YoY largely contributed by the savings deposits, which grew by 80.8% YoY. The current and savings account (CASA) ratio was largely stable at 20.4% as compared with 20.2% in Q1FY2014. The non-interest income posted a robust growth of 61.2% YoY largely contributed by the financial market segment (includes one-off income of Rs111.6 crore). The retail fee income also showed a strong growth of 68.6% YoY while the growth in the financial advisory income remained flat on a year-on-year (Y-o-Y) basis. The asset quality broadly remained stable as the non-performing assets (NPAs) and restructured loans remained largely similar to the Q1FY2014 levels. The provision coverage ratio remained high at 85.3%. Valuation and outlook Yes Banks Q2FY2014 results exceeded our estimate on account of a one-off income, which helped the bank to provide for the MTM losses on the investment book. The asset quality remains sound, though we expect the credit cost to increase in view
Results Particulars Interest earned Interest expense Net interest income Non-interest income Net total Income Operating expenses Pre-provisioning profit Provisions Profit before tax Tax Profit after tax Gross NPA (%) Net NPA (%) Q2FY14 2,501.3 1,829.2 672.1 446.1 1,118.2 405.3 712.9 179.1 533.8 162.6 371.1 0.28 0.04 Q2FY13 1,986.4 1,462.2 524.2 276.8 800.9 316.2 484.8 31.7 453.0 146.9 306.1 0.24 0.05 YoY % 25.9 25.1 28.2 61.2 39.6 28.2 47.1 464.5 17.8 10.7 21.2 4 bps -1 bps Q1FY14 2,397.9 1,738.8 659.1 442.1 1,101.2 421.2 680.0 97.0 583.0 182.1 400.8 0.22 0.03 Rs cr QoQ % 4.3 5.2 2.0 0.9 1.5 -3.8 4.8 84.7 -8.4 -10.7 -7.4 6 bps 1 bps

Shareholding pattern
Public & others 20%

Promoter 26%

MF & FI 19% Foreign 35%

Price chart
550 500 450 400 350 300 250 200 Jan-13 Oct-12 Jul-13 Apr-13 Oct-13

Price performance (%) Absolute 1m 3m 6m 12m -5.3

0.7 -15.5 -26.1

Relative -2.4 -18.8 -33.6 -16.7 to Sensex

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October 22, 2013

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of a weak macro-economic scenario. The banks tier I capital adequacy ratio (CAR) stood at 9.5% (including H1FY2014 profit) so we have factored for the equity dilution in FY2015. We have fine-tuned our estimate to factor a reduction in the marginal standing facility (MSF) rates and a relatively healthy growth in the fee income, and expect the earnings to grow at a compounded annual growth rate (CAGR) of 14.8% YoY. Consequently, we have revised our price target to Rs422 (1.7x FY2015 book value). Given the healthy asset quality and the return on asset (RoA) of ~1.5%, the valuation seems to be reasonable. We maintain our Buy rating on the stock. NIMs dip by 10 basis points QoQ on rise in cost of funds Yes Banks net interest income (NII) increased by 28.2% YoY, which was in line with our estimate. The NIM declined by 10 basis points QoQ to 2.9% due to a rise in the cost of funds (up 20 basis points QoQ). During the quarter, the bank raised its base rates by 25 basis points, which partly arrested the fall in the NIM. Going ahead, the reduction in the MSF rates and the access to the foreign exchange (forex) borrowing are likely to ease the pressure on the NIM. Advances growth slows down In view of the slowing economy and rising asset quality risks, the bank has slowed its asset growth (a growth of 12.7% YoY in the customer assets). In Q2FY2014, the large corporate advances grew by 13.1% YoY, which was largely in line with the growth of 13.6% YoY in total advances. Moreover, while the branch banking advances grew by 32.9% YoY, the commercial banking advances declined by 0.4% YoY. We expect the advances to grow at a CAGR of 18.0% over FY2013-15 in our estimate.
Business growth Particulars Advances Deposits CD Ratio (%) Q2 FY14 47,717.2 67,575.1 70.6 Q2 FY13 42,019.3 52,290.8 YoY % 13.6 29.2 Q1 FY14 47,897.6 65,244.8 Rs cr QoQ % -0.4 3.6

Non-interest income growth aided by one-off income The non-interest income increased by 61.2% YoY, which included a one-off income of Rs111.6 crore from the MTM gain on interest rate swaps. This one-off income helped the bank to fully absorb the MTM loss of Rs112.6 crore on the investment book as the bank has not opted to amortise the losses over FY2014 permitted by the Reserve Bank of India (RBI). The retail fees showed a strong growth of 68.6% YoY driven by an increase in the customer base and branches. The income from the transaction banking and financial advisory grew by 13.9% YoY and 3.7% YoY respectively. The operating expense increased by 28.2% YoY contributed by an increase in the branches and employee expenses.
Breakup of non-interest income Particulars Financial market income Financial advisory income Transactional banking Retail fees Total Q2 FY14 179.8 124.0 90.7 51.6 Q2 FY13 119.6 79.6 30.6 YoY % 3.7 13.9 68.6 61.1 Q1 FY14 174.1 143.6 87.9 36.5 442.1 Rs cr QoQ % 3.3 -13.6 3.2 41.4 0.9

47.1 281.7

446.1 276.9

Asset quality stable During the quarter, the bank reported slippages of Rs150 crore, which led to a marginal increase in the NPAs on a sequential basis. The slippages constituted the sale of assets to the asset reconstruction company worth Rs94 crore consisting of three accounts. However, the banks provision coverage remains comfortable at 85.3% levels and is also making contingent provisions (Rs27 crore in Q2FY2014) in view of the weakening macro-economic environment. Valuation and outlook Yes Banks Q2FY2014 results exceeded our estimate on account of a one-off income, which helped the bank to provide for the MTM losses on the investment book. The asset quality remains sound, though we expect the credit cost to increase in view of a weak macro-economic scenario. The banks tier I CAR stood at 9.5% (including H1FY2014 profit) and we have factored the equity dilution in FY2015. We have fine-tuned our estimate to factor a reduction in the MSF rates and a relatively healthy growth in the fee income, and expect the earnings to grow at a CAGR of 14.8% YoY. Consequently, we have revised our price target to Rs422 (1.7x FY2015 book value). Given the healthy asset quality and the RoA of ~1.5%, the valuation seems to be reasonable. We maintain our Buy rating on the stock.

80.4 -974bps

73.4 -280bps

Traction in savings deposits continues The aggregate deposits grew by 29.2% YoY contributed by a strong growth in the savings deposits (up 80.8% YoY). According to the management, the savings deposits accretion continues to remain strong (~80,000 accounts per quarter) led by increased customer acquisitions and an increase in the branches. The CASA ratio was stable on a sequential basis at 20.4% vs 20.1% in Q1FY2014.

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October 22, 2013

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Trend in NIM
3.1% 3.0% 2.9%

Trend in CASA ratio

25.0% 20.0% 15.0% 10.0%

2.8% 2.7% Q2FY12 Q2FY13 Q2FY14

5.0% 0.0% Q2FY12 Q2FY13 Q2FY14

Break-up of advances
100% 80% 60% 40% 20% 0% Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14

Break-up of non-interest income (Rs cr)

500 400 300 200 100 0 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14
Oct-12

Corporate Banking

Commrecial Banking

Branch Banking

Financial Market Transactional Banking

Financial Advisory Retail Fees

Trend in asset quality

0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% Q2FY12 Q2FY13 Gross NPA Net NPA Q2FY14

One-year forward P/BV band

700 600 500 400 300 200 100 0 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 -100 Oct-13 3.0x

Yes Bank

1.0x

1.5x

2.0x

2.5x

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October 22, 2013

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Profit and loss statement Particulars Net interest income Non-interest income Net total income Operating expenses Pre-provisioning profit Provision & Contingency Profit before tax Tax Profit after tax Balance sheet Particulars Liabilities Networth Deposits Borrowings Other liabilities & provisions Total liabilities Assets Cash & balances with RBI Balances with banks & money at call Investments Advances Fixed assets Other assets Total assets 3,076 420 2,333 1,253 27,757 37,989 177 4,117 73,626 3,339 727 42,976 47,000 230 4,833 3,616 1,205 47,806 54,519 252 7,895 3,795 45,939 6,691 2,583 59,008 4,677 49,152 14,156 5,641 73,626 5,808 66,956 20,922 5,419 7,009 80,347 22,497 5,442 FY11 FY12 FY13 FY14E FY11 623 1,870 680 98 1,092 365 727 FY12 857 2,473 933 90 1,450 473 FY13 1,257 3,476 1,335 216 1,926 625

Rs cr FY14E FY15E 2,656 3,186 1,533 4,189 1,671 343 2,175 685 1,912 5,098 2,153 406 2,539 825

Key ratios Particulars FY11 Per share data (Rs) Earnings 20.9 Dividend 2.5 Book value 109.3 Adj. book value 109.1 Spreads (%) Yield on advances 10.6 Cost of deposits 6.3 Net interest margins 2.7 Operating ratios (%) Credit to deposit 74.8 Cost to income 36.3 CASA 10.3 Non-interest income/ 33.3 total income Return ratios (%) RoE 21.1 RoA 1.5 Assets/Equity (x) 13.9 Asset quality ratios (%) Gross NPA 0.23 Net NPA 0.03 Provision coverage 88.6 Growth ratios (%) Net interest income 58.2 Pre-provisioning profit 37.7 Profit after tax 51.8 Advances 54.8 Deposits 71.4 Valuation ratios (x) P/E 17.8 P/BV 3.4 P/ABV 3.4 FY12 27.7 4.0 132.5 132.0 12.2 8.1 2.6 77.3 37.7 15.0 34.7 FY13 36.3 6.0 161.7 161.5 12.7 7.9 2.7 70.2 38.4 18.9 36.2 FY14E 41.5 6.9 195.2 194.4 12.8 7.7 2.6 67.9 39.9 24.3 36.6 FY15E 43.5 7.2 253.0 251.6 12.5 7.2 2.7 66.2 42.2 30.2 37.5

1,247 1,616 2,219

1,190 1,540 2,142

2,518 2,945

977 1,301

1,490 1,714 Rs cr FY15E 9,975 98,826 23,718 5,554

23.1 1.5 15.7 0.22 0.05 79.2 29.6 29.4 34.4 10.5 7.0 13.4 2.8 2.8

24.8 1.5 16.5 0.20 0.01 92.6 37.3 39.1 33.1 23.7 36.2 10.3 2.3 2.3

23.2 1.4 16.7 0.29 0.05 82.7 19.7 17.6 14.5 16.0 20.0 9.0 1.9 1.9

20.2 1.4 14.9 0.36 0.08 77.2 20.0 17.0 15.0 20.0 23.0 8.6 1.5 1.5

99,104 115,294 138,074 4,348 1,482 57,813 65,423 278 8,729

18,829 34,364 132 2,187 59,008

99,104 115,294 138,074

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October 22, 2013

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Jyothy Laboratories
Stock Update

Reco: Buy

Price target revised to Rs260

Company details Price target: Market cap: 52-week high/low: NSE volume: (no. of shares) BSE code: NSE code: Sharekhan code: Free float: (no. of shares) Shareholding pattern
Others 10% FIIs 16% Domestic institutions 10%

CMP: Rs190

Result highlights
Rs260

Rs3,065 cr Rs211/140 1.3 lakh 532926 JYOTHYLAB JYOTHYLAB 5.9 cr

Q2 results ahead of expectations: Jyothy Laboratories Ltd (JLL)s Q2FY2014 results are ahead of expectations largely on account of a higher than expected growth in the revenues during the quarter. However, the margin profile (including the gross profit margin [GPM] and operating profit margin [OPM]) was in line with the expectations for the quarter. Continuous media and promotional activities helped all the power brands to deliver a strong performance, which grew by 36%yoy during the quarter. Ujala Fabric Whitener continues to perform well and registered a stupendous revenue growth of 77% year on year (YoY) during the quarter. In a bid to reduce the debt on books the companys board has decided to make a preferential allotment of 1.5 crore shares to the promoter (raising around Rs250 crore) as well as issue redeemable non-convertible debentures of Rs400 crore. This will help the company to zero its interest cost and improve the earning growth in the coming years. Also, it will help the company to utilise the cash generated from the business operations in improving the growth prospects of its power brands in the coming years. Revenue growth of above 30%: JLLs revenues grew by 33.0% YoY to Rs306.1 crore (on a comparable basis) in Q2FY2014. The strong revenue growth can be attributed to a 25% year-on-year (Y-o-Y) volume growth and an 8% Y-o-Y priceled growth during the quarter. The two key segments of soaps & detergents and homecare products registered a strong revenue growth of 35% YoY and 37% YoY respectively in Q2FY2014. JLLs flagship brand Ujala Fabric Whitener maintained

Promoters 64%

Results (stand-alone) Price chart

230 210 190 170 150 130 Jan-13 Oct-12 Jul-13 Apr-13 Oct-13

Rs cr Q2FY14 305.9 0.2 306.1 263.4 42.7 13.1 15.4 17.9 22.4 0.2 22.2 -1.4 20.9 1.3 46.9 13.9 Q2FY13 229.8 0.3 230.1 208.8 21.3 11.8 15.3 16.5 1.3 0.0 1.3 0.0 1.3 0.1 46.0 9.3 YoY % 33.1 33.0 26.2 100.0 11.7 8.8 91 466 Q1FY14 318.2 1.0 319.2 270.5 48.6 12.9 15.2 16.7 29.6 0.0 29.6 -0.9 28.7 1.8 47.2 15.3 QoQ % -3.9 -82.1 -4.1 -2.6 -12.2 2.2 1.8 7.6 -24.3 -25.0 -27.3 -25.0 -28 -133

Particulars Net sales Other operating income Total revenues Total expenditure Operating profit Other income Depreciation Interest cost PBT Tax Adjusted PAT exceptional items Reported PAT EPS (Rs) GPM (%) OPM (%)

Price performance (%) 1m 3m 1.0 -2.9 6m 12m 8.6 -2.5 4.3 -8.2

Absolute 10.7 Relative to Sensex 7.3

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its leadership in the Fabricare category and registered a strong value growth of around 77% YoY while Maxo registered a growth of 33% YoY in the same quarter. Profitability improved substantially: The GPM improved by 91 basis points YoY to 46.9%. However, the improvement in the GPM was lower compared with the previous quarter due to a change in the sales mix and the impact of the rupees depreciation that resulted in a higher input cost. The employee cost as a percentage of sales declined by 358 basis points YoY to 9.3%, as there was restructuring at the organisation level due to the merger of Jyothy Consumer Products Ltd (JCPL) with JLL. Hence the OPM expanded by 466 basis points YoY to 13.9%. However, in an inflationary environment there was an impact of 2% of higher freight charges on the OPM which would have been absent in a normal business environment. The operating profit doubled YoY and stood at Rs42.7 crore in the quarter. At Rs22.2 crore the adjusted profit after tax (PAT) was ahead of our expectation of a profit of Rs16.7 crore for the quarter. Outlook and valuation: In H1FY2014 JLLs revenues and operating profit grew by 22% and 70% respectively at the stand-alone level. The management has maintained its guidance of around a 22-25% revenue growth and an OPM of around 15% for the stand-alone business in FY2014. Jyothy Fabricare Services Limited (JFSL) is expected to clock revenues of over Rs50 crore and turn earnings positive (at earnings before interest, depreciation, tax and amortisation [EBIDTA] level) at the end of the current fiscal. We have marginally revised our earning estimates for FY2014, FY2015 and FY2016 by 3%, 1% and 4% respectively. In line with the revision in earning estimates, we have revised upwards our 18-month price target for the stock to Rs260. We have not factored in the preferential allotment of 1.5crore shares to the promoter and raising of Rs400 crore through the issuance of redeemable non-convertible debentures. We shall factor in the same as and when the events unfold. However, our rough-cut calculation suggests that the incremental benefits of savings in interest cost due to a debt repayment could result in additional upside of 12-15% to our price target. At the current market price the stock trades at 23.2x its FY2015E earnings per share (EPS) of Rs8.2 and 15.0x its FY2016E EPS of Rs12.6. We maintain JLL as our top pick in the mid-cap fast moving consumer goods (FMCG) space and retain our Buy rating on the stock.

Key conference call highlights JLL posted a strong volume growth of 25% YoY in Q2FY2014. However, it has lost some amount of sales in Andhra Pradesh and Telangana due to the political instability and also due to the floods in Gujarat and Madhya Pradesh. Rest all the geographies have performed well for the company. The management has maintained its guidance of achieving around 22-25% revenue growth in FY2014. The power brands have performed extremely well for the company and registered a growth of 36% YoY in Q2FY2014. The new campaign for Ujala Fabric Whitener with the tag line Safedi ke Aage Ujala was well received and along with the relaunch helped the brand to achieve a strong volume growth during the quarter. Ujala Fabric Whitener registered a growth of 77% YoY in Q2FY2014. Maxo witnessed an increase in the revenue contribution to the companys revenues due to the season registering a growth of 33% YoY during the quarter. The company is planning to launch a new product in the household insecticide portfolio by the end of Q3FY2014. The detergent category witnessed some stress due to a high competitive intensity with respect to the price cuts and promotions done by two large multi-national competitors. This led to a slower growth in the detergent category for JLL in comparison to other categories during the quarter. The management is planning to do a relaunch of its Henko brand by January 2015, which will help in gaining share in the premium detergent segment. The dishwash segment (liquid and bar) has grown by 24% YoY, which is largely in line with the industry growth. Even though Fa has not performed as per the managements expectations, it was able to clock in revenues of Rs9 crore in H1FY2014. In H1FY2014, JLLs GPM at the stand-alone level stood at 47%. The management is confident that they would be able to maintain the GPM in the range of 47-48% going ahead as the full impact of the rupees depreciation and inflation has been absorbed in H1FY2014 itself. Hence, the company is not intending to take price increases in its portfolio over the next three to four months. JLL is planning to raise up to Rs400 crore of nonconvertible debenture (NCD; zero coupon bonds, whose repayment has to be done after three years) in order to provide liquidity and drive growth as now the business has set in with the required sales and

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profitability growth. Also, the promoters will infuse Rs250 crore by way of a preferential allotment of 1.5 crore shares by the end of Q3FY2014. Both these measures would help JLL to hive off its debt of Rs635 crore as on September 30, 2013. Also, out of this total fund raising of about Rs650 crore, the company is planning to acquire back IL&FS Trust Company Ltd (IL&FS) stake in JFSL for about Rs70 crore. JLL would be acquiring 0.3 crore of compulsory convertible cumulative preference shares of Rs10 each and fifty thousand equity shares of Rs10 each in JFSL presently held by IL&FS. JFSLs revenues for H1FY2014 are at Rs28 crore with a loss at the EBITDA level of about Rs2 crore, which the management feels would turn positive by March 2014. The management expects JFSL to end the fiscal with revenues of above Rs50 crore. JLLs products are available through 2.9 million outlets in India and have direct reach of 1 million outlets. Though the company does not expect the number of distributors to increase from the current level, it expects the sub-stockist (largely catering to rural India)
Segment-wise sales contribution in Q2FY2014
Other Products 1% Home Care 25%

will increase by 20% from the current 2,000 to 2,400 by the end of FY2014. Inventory of finished goods reduced from 55 days to 47 days as JLL has partnered with IBM to improve efficiencies in forecasting/demand planning and has also systematically implemented right source for finished goods procurement on total delivered cost basis. The company has taken several initiatives and targets overall working capital to reduce over the period of time.
Market share of JLL brands
80 70 60 50 40 30 20 10 0 Value Volume Value Volume Value Ujala Fabric Whitener Maxo Coil Volume Value Volume Value Volume Exo Bar 18 17 20 19 5 5 5 5 21 16 20 57 57 Sep-12 Sep-13 71 71

16

11 11

10 9

Maxo Liquid

Pril Liquid

Segment-wise sales contribution in Q2FY2013

Other Products 2% Home Care 25%

Soaps & Detergents 74%

Soaps & Detergents 73%

Thrust on regional brands becoming national in Q2FY2014

Thrust on regional brands becoming national in Q2FY2013

South 45%

South 49%

Non South 55%

Non South 51%

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October 22, 2013

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Valuations (consolidated) Particulars Net sales (Rs cr) Operating profit (Rs cr) Adjusted PAT (Rs cr) EPS (Rs) OPM (%) PE (x) EV/EBIDTA (x) RoE (%) RoCE (%) FY2012 913.0 84.1 38.4 2.8 9.2 68.6 42.3 6.2 8.6 FY2013 1,106.0 129.7 16.1 1.2 11.7 155.7 27.5 2.6 5.8 FY2014E 1,340.8 203.0 77.6 4.7 15.1 40.6 17.6 12.0 11.5 FY2015E 1,616.6 248.6 135.6 8.2 15.4 23.2 13.7 19.7 16.7 FY2016E 1,945.7 310.5 209.7 12.6 16.0 15.0 10.4 26.8 22.9

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