Background: Fast moving consumer Goods (FMCG) is the fourth largest sector of the Indian economy and the most consistently growing one too. Futhermore, it is the only sector that has created long term wealth for the market participants over the decades. Within the sector, Oral Care is a niche sub-seqment and one of the fastest growing one. Therefore, if we get an interesting story in the sector, one should strongly consider it. Increasing disposable earnings, growing middle class, rising oral awareness, convenient oral care products, growing distribution chain and logistics storage, increasing toothpaste penetration, development in oral care solution segments and others are some of the factors expected to drive the industry’s growth in the coming decades.
The Company: JHS is one of the biggest toothbrush contract manufacturers in the country and more excitingly has now launched its own set of branded oral care products under the brand “Aquawhite”. The company will have complete set of oral care products like tooth brush, power tooth brush, tooth paste, mouthwashes, dental floss and even oral care chewing gum. Company launched Aquawhite last year with its range of tooth brushes and tooth paste and is set to launch other products in the coming few quarters. Company has launched its tooth brush and paste in the North and East markets and is currently launching them in the southern and western markets as well. The TV advertisements have also started for these launched products. Within the first year of launch these oral care products have given around 12cr of revenue and with the launch of these brushes and toothpaste in the other two markets and impending launch of other oral care products, the future looks extremely promising. This is ofcourse in addition to the contract manufacturing business which itself is growing by leaps and bounds.
JHS was recently bailed out by funds infusion when it got into debt trap in 2011-12. Till 2011 the company used to be debt free when in lieu of a large order from its biggest customer, prompted them to take huge debt for a new facility built specially for that customer (P&G). After this came the body blow, when P&G went on to terminate the contract albeit illegally (as per JHS, and the company is fighting for compensation in court) and this created massive problems for the company as it had to not only deal with the debt payments but also on drastically reduced turnover. P&G and that point was contributing 75% of total revenues for JHS (Client concentration risk ). Needless to say this pushed JHS in a severe debt trap and was close to be shut down when it was rescued by promoters and a marquee PE investor pumping in money to revive the company as part of revival strategy. Also, taking it as a re-birth of the company, JHS consciously decided to use its expertise in Oral care products to produce their own branded version and rechristen its avatar as a FMCG player.
JHS is now an almost debt free company with enough capacities (55% capacity utilization), therefore, there’s no need of capex for near future. Furthermore, the company having learnt its lessons the hard way has tweaked its business model to become a branded FMCG player and not just a contract manufacturer. Though contract manufacturing is also growing very briskly they are ensuring that in future there’s no client concentration risk and therefore, would not have more than 25% revenue coming in from any single customer. At present, its working with a lot of customers like Dabur, Patanjali, Colgate, Lavoris, Amway,Apollo, Future Group, Dr. Fresh etc. With ace investor Nikhil Vora also a big stake holder in the company, combined with the changed business dynamics and direction of the company, JHS is bound to create serious share holder wealth in the coming years.
Valuations: JHS is almost a debt free oral healthcare based FMCG company available at just one time sales whereas other FMCG companies trade at 7-15 times their annual sales. Also given the fact that their business is growing exponentially we’ll get the twin benefits of growth and valuations re-rating. Promoters stake at the moment is around 37.55% which would increase to around 42% after conversion of warrants this year. The sales of company has grown from 35cr to 100cr in last two years with losses reducing drastically and the company even posting a notional profits of few lacs rupees at operating level in the latest quarter. The company is confident of posting profits this year.
Technicals: The stock has formed a firmed bottom and has made long term basing and accumulation pattern. The stock is ready for a fresh upmove and given what we have on the fundamental side, the stock will create sustainable wealth for its investors.
JHS Svendgaard is going to be a very interesting bet as it is in the right sector and we are catching it at the right time when there are business tailwinds and technical wings, with, just the kind of investors on-board, that we can hope to guide the management in creating serious shareholder wealth. Yes, the company has had terrible past 3-4 years but has handled the situation well and re-discovered itself in the right form – a FMCG player. And most importantly since its an FMCG player, if one looks to ride it, then ride it for long time rather than looking at it every day.
God Bless !!!
Disclaimer: It is safe to assume that I may have some vested interests in the stock. Also, the above stock story is my personal view in individual capacity. For rest, please look at the About page.