Buy Zydus wellness 3QFY11 – Good act; Anand Rathi

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Zydus wellness
3QFY11 – Good act; reiterate Buy
Zydus Wellness reported a healthy 3QFY11, with revenue and
PAT growing ~21% and ~37% respectively yoy. We remain
positive on the company’s growth prospects and reiterate Buy.

 Revenue up ~21% yoy. Zydus reported revenue growth of
~21% yoy. As the company has not initiated price hikes in any
brand, we believe the growth is largely volume driven. The
company has indicated that all brands have grown in double digits.
It has introduced a new product – ActiLife, a health food drink –
for consumers aged above 30.
 PAT growth of ~37%. EBITDA margin improved 358bps yoy
owing to lower other expenditure. Net profit was up ~37%, yoy.
Income tax rate in 3QFY11 stood at 33.2% compared with 34%
in 3QFY10. Benefit of the lower tax rate due to expansion at
Baddi will be seen from 1QFY12.
 Outlook. We remain positive about Zydus’ revenue growth
trajectory, given growing health awareness in India. Also, the
company’s rapid growth is mainly on account of prudent product
positioning and sub-segmentation strategy. Further, aggressive
brand building would help maintain the growth momentum and
market leadership.
 Valuation and risks. Our DCF-based price target is `719/share.
At our target price and FY12e earnings, the PE stands at 33x. Key
risks: higher competitive pressure as well as raw material prices.