Buy Zydus Wellness Ltd For Target Rs.2,000 - ICICI Securities
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A forgettable quarter in terms of margins while focus continues on laying building blocks
Zydus reported a decent (though below potential) top-line and volume growth prints of 12% and 5%, respectively. Gross margins were down 490bps YoY due to sharp inflation in milk prices and weak product mix. Continued brand investments and higher other opex lead to dismal EBITDA margin print of 3.8%. We note that Zydus probably has higher distribution expansion benefit (compared to peers), which is not getting reflected in headline growth numbers. With double-digit growth potential across its most brands, distribution expansion benefits and developments in focused international geographies are key legs of growth in the medium term. We like the new product development strategy aimed to address some key challenges.
We appreciate the research-backed focus with an intent to create problemsolution products. Zydus also expanded its direct reach which will allow it to participate in larger categories. That said, execution improvement and macro tailwinds in tandem, appear a necessity for performance. BUY retained.
* Unexciting top-line print: Reported revenue was up 12% YoY to Rs4.3bn with volume growth of 5%. We note that (1) this includes price hike benefit and (2) distribution ramp-up benefit (higher than many FMCG players). On brands (1) Complan performance continued to be soft with the slowdown in the overall HFD category, (2) Glucon-D did well (not a key season though), (3) Nutralite delivered strong double-digit growth, (4) Sweetners portfolio had a muted growth with continued scale-up in extensions, (5) Everyuth and Nycil had a good quarter.
* Sharp contraction in margins due to RM pressure: Gross margin was down 490bps YoY to 43.3% (down 11ppts QoQ). Margins were weak due to (1) high inflation in milk, (2) weak product mix and (3) currency impact. EBITDA margin came in at 3.8% down 420bps YoY. Zydus has ramped-up ad-spends to drive traction (up 9% YoY). Net profit was down 61% YoY to Rs85mn.
* Valuation and risks: Our earnings estimate largely remains unchanged for FY23- 24E. We model revenue / EBITDA / PAT CAGR of 12% / 19% / 23% over FY22-24E – 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 Rs2,000. At our target price, the stock will trade at 27x P/E multiple Mar-24E. Key downside risks are delays or failures in new product development or inability to expand distribution.
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