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MacVisit – Zydus Wellness
A niche wellness play
�� We highlight Zydus Wellness (ZYWL IN, NR) as a niche play in the rapidly
growing and under-penetrated wellness food category. Zydus has three
market leading brands – Sugar Free (low calorie sugar), low cholesterol table
spread Nutralite (butter replacement) and EverYuth (face wash). Zydus’ sales
and profit have grown 0.7x and 1.4x since FY09, backed by strong growth of
these brands.
�� We believe growing health awareness in urban consumers amidst an increase
in lifestyle-related diseases will keep wellness food category growth at high
levels (>20%) and Zydus feels it could be a potential beneficiary.
Strong and dominant brands continue to deliver
�� Zydus’ three major brands with dominant market share in their respective
categories – Sugar Free (80% share, 40% of sales), Nutralite (70% share,
36% of sales) and EverYuth (96% share in peel-off and 70% in scrubs, 24%
of sales) have been growing at 20-30% per annum for the last three years.
We see little medium-term risk to growth given the large number of diabetes
and cardio-vascular patients in India and positioning of Zydus’ brands as
preventive cures.
Product launches could stack up growth
�� While mainline brands continue to deliver strong growth, product launches in
niche categories like sugar-free beverages (Sugar Free Dlite), Zydus feels
male skincare (EverYuth Menz) and nutritional health drinks (Actilife) could
add considerably to its growth, as these are under-penetrated categories. The
company has been active in product innovations and is planning to enter the
~Rs20bn baby food market as well as the sugar-free ice-cream market.
Minimal competitive threat –growth and margin protected
�� Zydus achieved a 25.1% EBITDA margin in FY10 and has also improved its
margin by 140bp for the nine-month period ended Dec-10. Raw material costs
are ~32% of its sales and it has refrained from raising prices of its products in
the past due to its market development strategy (Nutralite prices have been
kept
competition and higher advertising and promotion (~33% of sales) spending.
The company also feels that new competition would also have a limited
impact on its growth and margins, due to its rapid category expansion and
unlikely irrational price war due to category under-penetration.
Tax benefits from Sikkim plant to boost profit from FY12E
�� Zydus has invested ~Rs0.5bn on a new plant in Sikkim for manufacturing its
Sugar Free and EverYuth brands, which will attract a lower tax rate (MAT of
20% from 33% currently) for the next five years. It hopes the lower tax rate will
boost its profit, as Sugar Free and EverYuth production shift to Sikkim from
FY12E.
Trading at ~40x LTM (last 12 months) earnings
�� Given the under-penetration in wellness foods and rising urban demand for
nutritional and wellness products, Zydus feels the growth outlook for its
products will remain strong. Zydus is currently trading at 40x its LTM earnings.
Based on Bloomberg consensus, it is trading at 24x and 20x its FY12E and
FY13E EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MacVisit – Zydus Wellness
A niche wellness play
�� We highlight Zydus Wellness (ZYWL IN, NR) as a niche play in the rapidly
growing and under-penetrated wellness food category. Zydus has three
market leading brands – Sugar Free (low calorie sugar), low cholesterol table
spread Nutralite (butter replacement) and EverYuth (face wash). Zydus’ sales
and profit have grown 0.7x and 1.4x since FY09, backed by strong growth of
these brands.
�� We believe growing health awareness in urban consumers amidst an increase
in lifestyle-related diseases will keep wellness food category growth at high
levels (>20%) and Zydus feels it could be a potential beneficiary.
Strong and dominant brands continue to deliver
�� Zydus’ three major brands with dominant market share in their respective
categories – Sugar Free (80% share, 40% of sales), Nutralite (70% share,
36% of sales) and EverYuth (96% share in peel-off and 70% in scrubs, 24%
of sales) have been growing at 20-30% per annum for the last three years.
We see little medium-term risk to growth given the large number of diabetes
and cardio-vascular patients in India and positioning of Zydus’ brands as
preventive cures.
Product launches could stack up growth
�� While mainline brands continue to deliver strong growth, product launches in
niche categories like sugar-free beverages (Sugar Free Dlite), Zydus feels
male skincare (EverYuth Menz) and nutritional health drinks (Actilife) could
add considerably to its growth, as these are under-penetrated categories. The
company has been active in product innovations and is planning to enter the
~Rs20bn baby food market as well as the sugar-free ice-cream market.
Minimal competitive threat –growth and margin protected
�� Zydus achieved a 25.1% EBITDA margin in FY10 and has also improved its
margin by 140bp for the nine-month period ended Dec-10. Raw material costs
are ~32% of its sales and it has refrained from raising prices of its products in
the past due to its market development strategy (Nutralite prices have been
kept
competition and higher advertising and promotion (~33% of sales) spending.
The company also feels that new competition would also have a limited
impact on its growth and margins, due to its rapid category expansion and
unlikely irrational price war due to category under-penetration.
Tax benefits from Sikkim plant to boost profit from FY12E
�� Zydus has invested ~Rs0.5bn on a new plant in Sikkim for manufacturing its
Sugar Free and EverYuth brands, which will attract a lower tax rate (MAT of
20% from 33% currently) for the next five years. It hopes the lower tax rate will
boost its profit, as Sugar Free and EverYuth production shift to Sikkim from
FY12E.
Trading at ~40x LTM (last 12 months) earnings
�� Given the under-penetration in wellness foods and rising urban demand for
nutritional and wellness products, Zydus feels the growth outlook for its
products will remain strong. Zydus is currently trading at 40x its LTM earnings.
Based on Bloomberg consensus, it is trading at 24x and 20x its FY12E and
FY13E EPS.
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