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JHS SVENDGAARD – Turnaround story with taste of PATANJALI

JHS Svendgaard Laboratories Limited offers oral care products (toothbrushes, toothpastes, mouthwash, whitening gels and denture products) for national and global FMCG brands. The Company also manufactures laundry products. The Company’s segments include Full services goods based contract manufacture-oral care, which includes manufacturing of oral care products as a contractor for other brands; Full services goods based contract manufacture sale-oral care, which includes manufacturing of own brand of toothbrush and toothpaste; Job Work-Oral care and hygiene care, which includes job work for customers on oral care and hygiene care products; Marketing and distribution, which includes trading of goods and distribution activities, and dental care clinics, which includes dental care clinic services. Its subsidiaries include JHS Svendgaard Dental Care Limited and JHS Mechanical & Warehouse Private Limited.

“It’s a turnaround story that grabs attention because it is a surrogate play on the disruptor’s aggression, offers an opportunity to participate in the growing oral care market, and now boasts of a clean and strong balance sheet.”

 

BIGGEST ORAL CARE CONTRACT MANUFACTURER

JHS is one of the biggest oral care contract manufacturers and currently produces oral care products like toothbrushes and tooth paste (50% of revenue each). The company currently caters to major FMCG manufacturers which are expected to constitute 70-75% of FY 2017-18 revenue. In addition, JHS is also focusing on its own brand (10-12% of revenue). The company’s major clients include Dabur, Patanjali, Amway, Vanessa, Marya Day, Walmart and Emami.

 

ORAL CARE: SECULAR GROWTH

India’s per capita toothpaste consumption of 147 g (vs China 277 g) is amongst the lowest in the world. Growing awareness about oral healthcare underlines the secular growth potential for this sector. Colgate, the dominant player in the toothpaste category has lost market share (57.4% to 55.1%) in last two years to Dabur and Patanjali, both JHS clients, suggesting a healthy orderbook growth will continue.

 

ZERO DEBT COMPANY

JHS had posted a loss during 2013-2016 on account of the failed arrangement with its then key client, a major FMCG player that led to litigation. Recently, the company reached an out-of-court settlement, helping it to clear a contingent liability of Rs 206 crore. Over the years, the company has worked on reducing debt and at present has near-zero debt on its balance sheet.

Learning its lesson from the above episode, JHS is working on the diversification of its client base and limiting exposure to any single entity. For 2020, JHS is targeting 50% revenue share from its own brand and limiting single client exposure to about 15%. However, depending on the robust contract manufacturing opportunity, the ambition to establish its own brand might undergo changes.

In the FY 2016-17, the company posted a profit of Rs 21.98 crore (vs loss of Rs 21.63 crore in FY 2015-16), partially aided by top line growth of 5.4%.

 

CAPACITY RAMP-UP AND THE CLIENT CONSOLIDATION

In the FY17, capacity utilisation improved to 80% from the level of 60% a year before.  The new capacity expansion, to be commissioned in early 2017-18 at Kala Amb, Himachal Pradesh, would increase capacity by about 80% (100% in toothpaste and 70% in toothbrush category). The company is targeting volume growth to the tune of 45-50% in 2017-18 as about 50% of the capacity expansion is already backed up by client commitments.

Client consolidation is another area where the outlook appears to be promising. In Q4 2017, company started tooth paste manufacturing for Patanjali along with the existing tooth brush manufacturing. Thus, making Patanjali its biggest client. Dabur is the second biggest-client, for which JHS had already been manufacturing both product categories. Thus, after Colgate, the two biggest FMCG players in the oral care products are sourcing from JHS.  Interestingly, their market share is increasing in this niche segment. Thus, in a way, JHS is a proxy for the entire segment of dental care growth in India.

 

JHS’ well established research and development department strives for constant innovation and high quality oral products. This assures that the company is well prepared for the future challenges of this vast and growing field. The company also has complete in house process facilities from injection molding to bristling and packaging to ensure strict quality control. The presence of a fully equipped Q.C. laboratory with latest gadgets combined with state of the art Vertical & Injection Molding machines from Demag and Cincinnati, Tufting & Trimming machines from Anton Zahoransky Gmbh, Germany and Blister Packing Machines ensures international quality of products.

 

TECHNICAL ASPECT

JHS Svendgaard

Recent advance as seen on the weekly chart attract long term investors in timely period while retailers are getting into after the last annual numbers announced. Stock has witnessed robust growth from tight sideways range seen around 5 to 12 levels at the bottoms to current above 55 levels (5X gains) and breaks above 50% Fibonacci retracement levels with sharp up move in price and volumes. Price thereafter entered into corrective move restricted to 50% retracement and follows higher to attempt breaking 61.8% retracement levels. Meanwhile, Weekly RSI drops to 0 levels and tick higher to north indicating long term bullishness intact and the rally to continue further upwards.

 

In Sum, Those who wish to make some invest on the growth story of Patanjali, can look to start by investing in JHS Svendgaard.

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