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Slower growth with trade inventory rationalisation

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%) & glucose powder (58.1%) categories

The company has more than 850 distributors with direct reach of 0.55 million retail outlets. Its high gross margins at ~55% give it a leeway to spend ~13% of sales on advertisement to support new products

Q3FY22 Results:

Zydus reported dismal results with mere 1.7% sales growth

Sales were up 1.7%YoY on impacted by slower demand in rural region

EBITDA was at | 32 crore, down 34.8% YoY, with margins at 8.3%

Consequent PAT was at | 22.7 crore against adjusted PAT of | 35.9 crore

What should investors do? Zydus Wellness’ share price has given 96.3% return in last five years (from | 865 in February 2017 to | 1700 in February 2022).

We cut our FY23E & FY24E EPS estimates by 7.7% & 5.9%, respectively, on account of adverse impact of commodity inflation

We continue to maintain our BUY rating on the stock

Target Price and Valuation:

We value the stock at | 2200 on ascribing 30x FY24 earnings multiple

Key triggers for future price performance:

Synergistic benefits from integration of acquired Heinz India business to inch up operating margins above 20% in next three years

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 55x FY24 earnings. BUY with TP of | 740

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