Buy Zydus Wellness Ltd For Target Rs.2100 - ICICI Direct
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Strong recovery led by summer brands
About the stock: Zydus Wellness (ZWL) is one of the FMCG companies present in healthcare, nutrition & related products. The company has six brands i.e. Sugarfree, Complan, Glucon-D, Nycil, Everyuth & Nutrilite
* It commands dominant market share in Sugar substitute (96%), Prickly heat powder (34.2%) & Glucose powder (60.4%) categories
* The company has more than 850 distributors with direct reach of 0.6 million retail outlets. Its high gross margins at ~55% give it a leeway to spend ~13% of sales on advertisement to support new products
Q1FY23 Results: Zydus reported healthy results with 10.3% volume growth
* Sales were up 16.6%YoY led by 10.3% volume growth & 6% price hikes
* EBITDA was at | 148.1 crore, up 5.5% YoY, with margins at 21.3%
* Consequent adjusted PAT was at | 139.9 crore, growth of 6.9%
What should investors do? Zydus wellness share price has given 83% return in last five years (from | 885 in July 2017 to | 1618 in July 2022)
* We cut our FY23 & FY24E earnings estimate by 8.1% & 2.2% respectively due to high inflation in commodity prices specifically in H1FY23
* We continue to maintain our BUY rating on the stock
Target Price and Valuation: We value the stock at Rs. 2100 on ascribing 30x FY24 earnings multiple
Key triggers for future price performance:
* RM inflation is likely to cool down by H2FY23, which would give leeway to spend behind brands aggressively. Likely to perk up volume growth
* Brand extensions & new variant launches in Glucon-D, Complan, Sugarfree, Nutralite to aid revenue growth
* Expansion in direct distribution, chemist channel sales & doctor’s advisory to play pivotal role in growing the business
Alternate Stock Idea: We like Dabur in our FMCG coverage
* Significant shift in consumption towards healthier, natural & Ayurveda based products & aggressively foray in many big categories (edible oil, carbonated drink, household insecticides, fruit drinks) would be driving growth for Dabur
* Value the business 52x FY24 earnings. BUY with TP of Rs. 680
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