[T.S.R:17093] Jyothy Labs-Robbing Both Peter And Paul

Jyothy Labs: Robbing Both Peter And Paul

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Jyothy Labs has bought a 14.9 per cent stake in Henkel India for Rs 61 crore, by paying Rs 35 per share to TN Petro. It now proposes to buy out Henkel AGs 51 per cent stake in Henkel India, and then would be required to make an open offer for another 20 per cent of the Equity held by the remaining shareholders. Even without aggressive bidding, the entire deal value will work out to roughly Rs 600 crore. What is unknown is if Henkel AG will sell just the manufacturing facilities or will sell the brands alongside. If so, will there be an additional cost for the Brands? More important, in the process Jyothy will also have to acquire the Debt amounting to Rs 600 crore that Henkel carries on it's books. Thus, Jyothy with a market cap of roughly Rs 1700 crore is looking to make an acquisition with an EV of Rs 1200 crore with zero value assigned for the brands.

 

Where does this money come from? Jyothy has Rs 300 crore on it's books which it had raised 3 months ago to fund it's Laundry/Dry Cleaning operations. Now, the investors will have to be approached for more money through further Equity dilution or debt to fund the buy-out. Henkel it must be remembered has never made money and is still a loss making entity. Thus, the massive dilution at Jyothy will end reducing the RONW and ROCE, with no apparent tangible benefit. This is akin to robbing both Peter and Paul. 

 

We believe that Jyothy will take at least 1.5-2 years to turn around the business of Henkel. Jyothy wants to acquire close to 75% stake in Henkel India and has plans to leverage the strong brands of Henkel along with increasing penetration in Urban markets and Delhi area, some regions where Jyothy is currently weak. Henkel  India has a debt of Rs 5.20 bn on its books, which JLL is planning to restructure if they acquire the company eventually. JLL has Rs 2.70 bn cash on its books, of which Rs 0.60 bn has been used up for recent stake purchase. 

Details of Henko Stake Purchase 

Jyothy Laboratories made a all-cash deal with Henko by paying Rs 609 mn for 14.9% stake that it purchased from co-promoter A.C. Muthiah of TN Petroproducts. The company plans to purchase the Henkel AG's 51% stake by mid-April. However, there are many companies like GCPL, Emami and Wipro who are quite aggressively seeking Henkel and there is a possibility that deal might end up having a high valuation as well. For year ending Dec'10, Henkel India made sales of Rs 5.39 bn on consolidated basis and made a loss of Rs 518 mn at the PAT level. Henko India's sales from the international portfolio comprise roughly Rs 3.18 bn or 60% of total Henkel India's sales on which JLL will be required to pay 2% as royalty payments if it happens to acquire Henkel India.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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