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Margin headwinds remain but consistent double-digit growth delivery keeps us positive; maintain BUY

Our view

While Q2 performance was disappointing on the margins front, a strong 12% revenue growth with volume growth of 8% indicates strength of the brands and improved execution by the company. Consistent double-digit growth in Complan and Everyuth with market share gains and enhanced proposition launched during Q2 exhibits management’s focus to leverage the brand equity and further accelerate share gains. Sales reorganization should drive better sales for Nutralite while brand extensions should deliver strong growth for Sugarfree and Glucon-D. New launches across the portfolio with NPD of several launches in coming quarter and increased focus in MT and e-com channel creates strong growth visibility. We see a long growth headroom for the company given strong brand equity and leadership position in most segments, less than 20% penetration across its categories, multiple brand extension opportunities especially in health and wellness, strong R&D capabilities of the parent company and best-in-class brand spends, all of which can help the company grow above industry growth rates for a long period of time. Zydus remains one of our top mid-cap staples pick.

Result Highlights

* Topline – Revenue grew 12.2% YoY to Rs3.8bn on a base of 4.9% growth, it has surpassed Q2FY20 level; growth much higher excluding glucose and prickly heat powder; doubl-digit growth in Nutralite, Everyuth and Complan.

* Margins – Gross margin lower by 550bps to 48.2% impacted by inflation in RPO and milk prices. EBITDA margin up 10bps to 8% led by lower other expenses and A&P spends.

* Earnings – PAT at Rs21.1cr vs loss of Rs7.4cr in Q2FY21.

* Market share – Glucon-D - 58.2% market share, Complan - 5.4% share in HFD, Sugarfree – 96.2% in sugar substitutes (+180bps), Nycil – 34.5% in prickly heat powder, Everyuth scrub – 39.2% in facial scrub (+540bps), Peel Off – 77.3% in peel off, Everyuth - 6.5% share in overall facial cleansing segment at No. 5 position.

* Other highlights – Key brands continue to hold leading positions; e-commerce business grew multifold in Q2 and International business registered high double-digit growth rate, contributing 7% and 5% respectively to overall sales; 4.2% price hike taken in 2Q and another 3% now in 3Q which should help maintain margins, all channels other than urban GT doing well, ongoing sales organization and digital transformation.

Valuation

Given the expected scale-up in new segments, opportunities for inorganic growth and improving return ratios, ZYWL’s looks attractive at current valuations. We model in revenue/EBITDA/PAT CAGR of 12%/17%/17% over FY21-24E and maintain our BUY rating with a TP of Rs 2,502 based on 40x FY24E earnings, a 10% discount to larger peers in the space

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