Buy Zydus Wellness Ltd for the Target Rs 665 by Motilal Oswal Financial Services Ltd
Soft seasonal demand; new initiatives firing well
* Zydus Wellness’ (Zydus) consol. sales grew 67% YoY to INR14.4b in 1QFY27. Domestic business revenue rose 5% YoY (est. 7%), impacted by delayed summer and unseasonal rainfall in North and East India. Glucon-D and Nycil revenue declined 12% YoY (-10% in 4QFY26).
* Non-seasonal portfolio remained healthy, with Everyuth revenue up 35% YoY (40% in 4QFY26) and the Food & Nutrition up 16% YoY (9% in 4QFY26). In the Food & Nutrition segment, Nutralite continued to report strong growth, Complan recorded double-digit growth, and Sugar Free delivered high-double-digit revenue growth. RiteBite Max Protein continued to deliver healthy volume and value growth. International business revenue (including Comfort Click) grew 25% YoY.
* EBITDA margin declined 130bp YoY to 16.8% (est. 16.9%). However, on liketo-like basis, core portfolio and Comfort Click EBITDA margins improved. RiteBite EBITDA margin improved to double digits (from breakeven at acquisition). We model domestic EBITDA margin of 14.5% for FY27 and 15.2% for FY28. Zydus expects international business EBITDA margin to remain at 14-15%; we model a similar margin.
* The stock is trading at 25x FY27E and 21x FY28E EV/EBITDA. We model ~11% domestic revenue CAGR and ~20% EBITDA CAGR over FY26-28E. On a consolidated basis, we model ~26% revenue CAGR and ~37% EBITDA CAGR. Zydus’ recent initiatives around RiteBite and Comfort Click are aiding revenue and operating margin.
* Based on SoTP, we value India business at 30x and International (Comfort Click) at 20x FY28E EV/EBITDA to arrive at a TP of INR665 (implied consolidated 25x EV/EBITDA and 30x P/E at FY28E). Maintain BUY.
Highlights from the management commentary
* Management does not expect the weak summer season to create inventory overhang next year, noting that inventory levels in the company's distribution system are broadly in line with or lower than last year.
* The company expects its FY27 effective tax rate to remain around 25%, although the cash tax outflow will be lower during the current financial year.
* Management reiterated that Comfort Click has been EPS-accretive since 4QFY26, with profitability continuing to improve in 1QFY27.
* The company continued to expand its international footprint through the launch of the WeightWorld D2C platform in the US, expansion into Walmart Marketplace, and further growth across the Middle East.
* Max Protein continues to grow at more than double its historical growth rate, driven by higher brand investments, wider distribution and continued portfolio innovation.
Valuation and view
* We maintain our EBITDA estimates for FY27 and FY28.
* The stock is trading at 25x FY27E and 21x FY28E EV/EBITDA. We model ~11% domestic revenue CAGR and ~20% EBITDA CAGR over FY26-28E. On a consolidated basis, we model ~26% revenue CAGR and 37% EBITDA CAGR. Zydus’ recent initiatives around RiteBite and CC are aiding revenue and operating margin.
* Based on SoTP, we value India at 30x FY28E EV/EBITDA and International (Comfort Click) at 20x FY28E EV/EBITDA to arrive at a TP of INR665 (implied consolidated 25x EV/EBITDA and 30x P/E at FY28). Maintain BUY.
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