Buy Zydus Wellness Ltd For Target Rs. 2800 - ICICI Direct
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Robust growth; margins to expand…
Zydus Wellness (ZWL) reported healthy results with revenue growth of 24.2% due to ~| 100 crore sales loss in base quarter due to lockdown imposed in March 2020. The company witnessed strong double digit growth in Sugar Free & Nycil. Further, discretionary brand Everyuth also saw strong growth with an increase in out of home activity. HORECA dominant brand like Nutralite saw a sharp recovery with sales reaching at pre-Covid levels in Q4.
ZWL maintained its leadership position in five of its brands - Glucon-D, Sugar Free, Ever-Yuth Scrub, Peel off Face Mask & Nycil. Glucon-D & Complan command market share of 58.4% & 5.5% in glucose powder & MFD category, respectively. Gross margins witnessed a 70 bps improvement given the company was holding low cost SMP (Skimmed Milk Powder) inventory.
With 204 bps savings in employee spends & 237 bps savings in overhead spends, the company was able to increase marketing spends by 255 bps. Operating profit increased 38.6% to | 145.4 crore. Operating margins improved 250 bps to 24%. Interest cost declined 75.5% in Q4 with repayment of more than | 900 crore debt after raising funds through QIP. This led to PAT growth of 91.8% to | 133 crore.
New launches, distribution expansion to drive growth
In the last one year, the company focused on new product with the launch of 11 new products. It is also supporting new products like Nutralite Doodh Shakti butter spread & Nutralite Choco spread through new ad campaigns. ZWL launched ‘Soothing body mist’ under Nycil brand in Q4. On the distribution expansion side, the company doubled its direct reach to 5.5 lakh outlets and is also driving outreach programmes to increase penetration in hinterland. It has a presence in more than 800 towns now. E-commerce channel sales increased 3x in FY21. It is now contributing 3.6% of sales. We believe new product & distribution expansion would drive the growth of the company. We estimate 11.5% revenue CAGR in FY21-23E.
Major RM cost at comfortable level; margins to perk up
Though milk prices have moved up from November 2020, the company was covered for increase in milk prices. Moreover, second wave of pandemic led to dip (10-12% from peak in January) in milk prices again. Palm oil prices have risen sharply, which would impact margins for Nutralite (contributes 2- 3% to sales). Hence, only cost inflationary raw material for ZWL is crude based packaging material. We believe it would be able to pass on inflationary cost with staggered prices hikes. Moreover, certain permanent cost saving measures would result in higher operating margins, going forward.
Valuation & Outlook
The large opportunity in health, nutrition space gives enough room for existing brands to grow to a sizable level. Moreover, strong gross margins give the company leeway to spend more on advertisements for brand building. We believe the visibility for strong revenue, earnings growth has increased and the stock can command higher multiples similar to some of its peers in the FMCG space. We maintain our BUY recommendation with a revised target price of | 2800/share (earlier | 2500).
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