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Symphony; retain top pick status

Q4 performance was impressive with double digit-growth (on 2-year CAGR as well) across brands except for Glucon-D which was impacted due to delayed onset of summer season. We believe the acquisition of Heinz India business is transformational for Zydus, given the increased consumer focus on health and wellness – likely accelerated consumer adoption of >70% of the portfolio (Sugar Free, Glucon-D, Nutralite and Complan).

We especially like the new product development strategy (contributes ~3.5% vs ~1.5 earlier) aimed to address some key challenges – SugarLite to address the taste penalty, Sugar Free Green is a natural product, Complan Nutrigro to regain lost medical connect of the brand. Zydus also expanded its direct reach to 0.55mn outlets by Mar’21 which will allow it to participate in larger categories. Deleveraging is likely to drive FCF generation faster. Reiterate BUY.

* Strong growth momentum continues:

Reported revenue / EBITDA / recurring PAT grew by 24% / 39% / 85% YoY driven by strong performance of double-digit growth in most of the consumer brands (double-digit growth in 2-year CAGR as well) except for Glucon D as the summer season was delayed. Nutralite (75% is B2B business) also continued to witness sequential recovery.

* Margins expanded despite higher ad-spends driven by input cost benefit and operating leverage:

Gross margin expanded 70bps to 54.6% driven by better product mix and benefits of deflationary milk prices. However, reported EBITDA margin expanded higher by 260bps to 24% despite significant step-up in ad-spends (+450bps YoY; +65% YoY) driven by operating leverage - lower staff cost (-300bps) and other expenses (-140bps) due to cost saving initiatives. Management stated that they are on track to reach EBITDA margins of 20% by FY22.

* Other highlights:

1) OCF / FCF grew by 11% / 14% to Rs2.9bn / Rs2.7bn, 2) working capital days increased by 21 days largely due to higher inventory days and lower creditor days, 3) Direct reach increased to 0.55mn outlets, 4) E-commerce grew ~3x in FY21 (~3.6 of domestic revenues), 5) Exports business grew by ~2x in FY21 (~3% of overall business), and 6) launched 11 new products in FY21 (NPD now contributes ~3.5% of business).

* Valuation and risks:

We increase our earnings estimates by ~3% for FY22-23E. We model revenue / EBITDA / PAT CAGR of 11% / 19% / 36% over FY21-23E – net profit likely to grow ahead of revenue and EBITDA driven by deleveraging of balance sheet. Maintain BUY with a DCF-based unchanged target price of Rs2,500. At our target price, the stock will trade at 35x P/E multiple Mar-23E. Key downside risks are delays or failures in new product development or inability to expand distribution.

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