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Add For Zydus Wellness Ltd Target Rs.1,858

Weakness persists on both growth and margin fronts; downgrade to ADD despite structural positives

Our view

Q4 performance was quite disappointing both on the growth and margin fronts despite price hikes taken given sequential market share losses in key brands Complan, Sugar Free and Nycil leading to an inferior product mix. Complan and Sugar Free continue to struggle since last few quarters due to category decline and less aggression in distribution expansion. Few positives were strong double‐digit growth in Sugarlite, Nutralite and Everyuth with stable market share and double‐digit growth in International markets albeit the base remains low. Sales reorganization should drive better sales for Nutralite while early onset of summer should drive growth in Nycil and Glucon‐D. New launches across the portfolio with NPD of several launches in coming quarters and increased focus in MT and e‐com channel create decent growth visibility. We see a long growth headroom for the company given strong brand equity and leadership position in most segments, less than 20% penetration across its categories, multiple brand extension opportunities especially in health and wellness, strong R&D capabilities of the parent company and best‐in‐class brand spends, all of which can help the company grow above industry growth rates over the longer term. Margins should start improving post 1H as headwinds persist due to uncertainty around inflation and inferior product mix. Category decline in key segments leading to growth headwinds and competitive intensity expected to delay the recovery in margins makes us cut our earnings by 7‐9% and thereby downgrade our rating to ADD from Buy despite the structural positives.

Result Highlights 

* Topline – Revenue grew 5.6% YoY (vs our expectation of 9%) to Rs6.4bn on a base of 24.7% growth, lower than expected growth on the face declined market share in Q4 vs Q3; key positives were double‐digit growth in Sugarlite, Nutralite and Everyuth.

* Margins – Gross margin lower by 380bps to 50.8% impacted by inflation in RPO and milk prices, however up 250bps driven by price hikes. EBITDA margin dipped 190bps to 22.1% as management cut A&P spends by 11% YoY, however it is still up sequentially. Overall management has relied on lower A&P spends in FY22 to aid operating margins.

Valuation

Given continued underperformance in recent quarters on both growth and margin delivery coupled with instances of market share loss in key segments, we trim our estimates by 7‐9% and now build in revenue/EBITDA/PAT CAGR of 11%/18%/5% over FY22‐24E and downgrade from Buy to ADD with a revised TP of Rs 1,858 based on 35x FY24E earnings (in‐line with average). We now expect a re‐rating only once we see sustainable double‐digit volume growth and margin expansion backed by successful innovation and distribution expansion.

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