Buy Zydus Wellness Ltd For Target Rs.2800 - ICICI Direct
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Second Covid-19 wave drags sales…
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 and Nutralite.
* It commands a dominant market share in sugar substitute (93%), prickly heat powder (35.8%) & glucose powder (58.4%) categories.
* The company has more than 1700 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.
Q1FY22 Results: Zydus reported strong earnings growth in Q1FY22 results.
* Sales were up 11.2% YoY on low base; second wave impacted business
* EBITDA was at | 140.4 crore, up 14.8% YoY, with margins at 23.5%
* Consequent PAT was at | 130.8 crore (up 46.6 % YoY)
What should investors do?
Zydus Wellness’ share price has given 170% return in the last five years (from | 805 in August 2016 to | 2175 in August 2021).
* We roll over FY24 numbers with expectation of full recovery in Glucon-D, Everyuth & Nycil brands and stabilisation of commodity prices
* We continue to maintain our BUY rating on the stock
Target Price and Valuation: We value the stock at | 2800 on ascribing 36x FY24 earnings multiple.
Key triggers for future price performance:
* Synergistic benefits from integration of acquired Heinz India business to perk up operating margins by ~260 bps in next three years
* Brand extensions & new variant launches in Glucon-D & Complan, respectively, 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: Apart from ZWL, We also like HUL in our FMCG coverage.
* With synergistic benefits of acquired nutrition business, strong premiumisation trend & robust distribution, HUL would continue to grow the revenues at a sustainable pace
* Value the business 55x FY24 earnings. BUY with a TP of | 2,750.
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