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Highlights from the Quarter (Q3 FY22):

The demand during the seasonally weak quarter was further affected by impact of third wave of the pandemic resulting into the muted top-line growth. The Management also cited inventory correction actions taken at the distributors’ level as one of the reasons for flat sales. Further, the inflationary pressure on key raw materials and packaging materials continued to put pressure on the gross margins resulting into weaker than expected operating level performance. The company has taken two price hikes and the Management expects that the impact of the same shall be reflected in gross margin improvement in the coming quarters.

9M FY22: During 9M FY22, Zydus Wellness recorded a top-line growth of 8.6% YoY to Rs.1,369.3 cr; the EBITDA margin stood at 14.8% as against 15.8% in 9M FY21. At the net level, the profit stood at Rs.175.6 cr as against 117.7 cr – the improvement was on account of substantial reduction in interest expenses on account of debt-reduction.

Glucon-D: maintained its number one position with a market share of 58.1%;

Complan: maintained its fourth position with market share of 5.2%;

Sugarfree: retained its number one position with a market share of 96.0%;

Nycil: maintained its number one position with a market share of 34.0%;.

Everyuth: Scrub maintained its number one position with a market share of 39.2% in the facial scrub category, and Everyuth Peel-off maintained its number one position with a market share of 76.4% in the Peel-off category. Everyuth brand now has a market share of 6.5% in the overall facial cleansing segment and is ranked 5 th .

International: The Management expects the international business to cross Rs.100 cr turnover during the next fiscal. Further, on the conference call, the Management stated that the company is targeting a turnover of Rs.1,000 cr from international markets over the next few years. Currently, SugarFree franchise and Complan constitute 93% of the international business.

Channel: Currently, the direct distribution reach has increased to 5.5 lakh outlets; the company expects to add another 1 lakh outlets next year and expects to reach a total of 10 lakh outlets over the next few years. FY21 break-up stood as follows – General Trade (60%), Modern Trade (11%), e-Commerce (5%) & Others (24%) which include HoReCa (Hotels, Restaurants & Cafes), Food Services, Government Channels.

OUTLOOK AND VALUATION

ZWL (a part of Zydus Cadila group) commands the leading position in 4 of the 6 product categories it is present through its offerings Sugarfree, Everyuth Peels & Scrubs, Glucon-D & Nycil. Sugar Free, the flagship product of the company leads the segment with ~96% market share. Following the acquisition of Heinz India, the product portfolio has widened and addressable market has grown multifold. The products are passed through a robust supply chain network across the country. The Management is focusing on driving the volumes through new product launches, widening geographical presence and deepening rural presence. The inflationary pressure on key raw materials and packaging materials may keep the profitability under check in the short term, however, we expect margins to scale back to 20% over the next two years driven by cost optimization processes under Transformation 2.0 (creating a simple organization structure leading to cost efficiencies and digitization of processes across value chains, business analytic tools, hrms, freight management tools, sales force automation which are under various stages of development and implementation) and price hikes. We have revised our estimates downwards to factor in the weaker-than-expected performance. We now expect the company to deliver an EPS of Rs.46.2/63.0 in FY22/FY23 – maintaining our target multiple of 40x, we derive our target price of Rs.2,520 which is 50.7% upside from current levels, with an investment horizon of 12-18 months.

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