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Company Snapshot / Business Description RATING: BUY
• Zydus Wellness is a 73% subsidiary of Cadila Healthcare and a fast growing
player in the healthcare, wellness, cosmetics and nutrition segment.
• Company has well known brands like Sugar Free (Low Calorie Sweetener),
Nutralite (Low Fat Butter) and EverYuth (Skin Care range). It is the market
leader in sugar free sweetener and low fat butter.
• All the three brands are growing at a very healthy rate with Sugar Free
growing at more than 30% CAGR, EverYuth at more than 50% CAGR and
Nutralite at more than 30% CAGR.
• Company has a very strong distribution network with direct reach to 850+
towns and 50,000+ population.
Investment Rationale
• Focus on niche segments: Zydus is continuously focused on niche categories
and exploration of new concepts. It has forayed into virgin territories with
strong products; SugarFree(80% market share in sugar substitutes), EverYuth
(98% market share in peel-offs) and Nutralite (largest selling table spread).
Absence of competitors in its segment allows company to enjoy considerable
pricing power.
• Tax rate expected to go down from Q1FY12: The new facility at Sikkim,
expected to start in Q1FY12, is located in a tax free zone. It would bring
overall tax rate down to 17% from 34% currently, thereby translating into a
healthy bottomline growth.
• Strong and consistent financials: Zydus Wellness has shown consistent
improvement in profit margins and return ratios and has been a consistent
dividend payer. Zydus has minimal working capital as almost its entire
business works on advance collection terms. Over the last five years, net
sales and net profit have grown at 67% and 93% CAGR respectively.
• Zero debt company: Zydus is a zero debt company but has a huge cash
reserve of Rs.864.5 mn on its books. This gives it an opportunity to leverage
and expand its activities without stretching its balance sheet much. The cash
could also be used for synergetic acquisitions.
• Rapid product launches with differentiated offerings: Zydus rolled out
ActiLife (three variants), SugarFree Herbal and Nutralite Mayonnaise. To
engage consumers at various points of sugar consumption, company has
rolled out SugarFree drops (in addition to powder and pellets) as well as
SugarFree mint toffees. Also, it is test marketing Purify hand sanitizers, with
herbal properties.
Key Risks
• Company’s products being niche, run the risk of not getting accepted in the
market due to lack of awareness about the product or ineffective marketing.
• Two thirds of company’s sales come from its two products; namely, Sugar-
Free and Nutralite. These brands are likely to draw competitors’ attention
due to the opportunity they present, thereby resulting in price wars.
• Over the past one year, price of palm oil has risen by 50%. This is expected
to put pressure on margins of Nutralite as company is unable to pass on entire
cost to customers.
• Overall, revenues for the sector are going to get squeezed due to intense
competition from the two MNC giants – P&G and HUL and domestic player,
ITC; all of which are aggressively launching products at several price points
to gain market share.
Summary
• Over the past one year, Zydus Wellness has out-performed the major indices
returning 22.15% against 6.48% for the Sensex and 6.46% for the Nifty.
• With its slew of products released periodically, strong brands and USP of
health and wellness, Zydus Wellness is expected to grow well over the long
term.
• At the CMP of Rs.621, Zydus is available at P/E of 30.00 and 22.10 of its
FY12E and FY13E earnings respectively. This expensive valuation is justified
considering the niche segment it caters to.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Company Snapshot / Business Description RATING: BUY
• Zydus Wellness is a 73% subsidiary of Cadila Healthcare and a fast growing
player in the healthcare, wellness, cosmetics and nutrition segment.
• Company has well known brands like Sugar Free (Low Calorie Sweetener),
Nutralite (Low Fat Butter) and EverYuth (Skin Care range). It is the market
leader in sugar free sweetener and low fat butter.
• All the three brands are growing at a very healthy rate with Sugar Free
growing at more than 30% CAGR, EverYuth at more than 50% CAGR and
Nutralite at more than 30% CAGR.
• Company has a very strong distribution network with direct reach to 850+
towns and 50,000+ population.
Investment Rationale
• Focus on niche segments: Zydus is continuously focused on niche categories
and exploration of new concepts. It has forayed into virgin territories with
strong products; SugarFree(80% market share in sugar substitutes), EverYuth
(98% market share in peel-offs) and Nutralite (largest selling table spread).
Absence of competitors in its segment allows company to enjoy considerable
pricing power.
• Tax rate expected to go down from Q1FY12: The new facility at Sikkim,
expected to start in Q1FY12, is located in a tax free zone. It would bring
overall tax rate down to 17% from 34% currently, thereby translating into a
healthy bottomline growth.
• Strong and consistent financials: Zydus Wellness has shown consistent
improvement in profit margins and return ratios and has been a consistent
dividend payer. Zydus has minimal working capital as almost its entire
business works on advance collection terms. Over the last five years, net
sales and net profit have grown at 67% and 93% CAGR respectively.
• Zero debt company: Zydus is a zero debt company but has a huge cash
reserve of Rs.864.5 mn on its books. This gives it an opportunity to leverage
and expand its activities without stretching its balance sheet much. The cash
could also be used for synergetic acquisitions.
• Rapid product launches with differentiated offerings: Zydus rolled out
ActiLife (three variants), SugarFree Herbal and Nutralite Mayonnaise. To
engage consumers at various points of sugar consumption, company has
rolled out SugarFree drops (in addition to powder and pellets) as well as
SugarFree mint toffees. Also, it is test marketing Purify hand sanitizers, with
herbal properties.
Key Risks
• Company’s products being niche, run the risk of not getting accepted in the
market due to lack of awareness about the product or ineffective marketing.
• Two thirds of company’s sales come from its two products; namely, Sugar-
Free and Nutralite. These brands are likely to draw competitors’ attention
due to the opportunity they present, thereby resulting in price wars.
• Over the past one year, price of palm oil has risen by 50%. This is expected
to put pressure on margins of Nutralite as company is unable to pass on entire
cost to customers.
• Overall, revenues for the sector are going to get squeezed due to intense
competition from the two MNC giants – P&G and HUL and domestic player,
ITC; all of which are aggressively launching products at several price points
to gain market share.
Summary
• Over the past one year, Zydus Wellness has out-performed the major indices
returning 22.15% against 6.48% for the Sensex and 6.46% for the Nifty.
• With its slew of products released periodically, strong brands and USP of
health and wellness, Zydus Wellness is expected to grow well over the long
term.
• At the CMP of Rs.621, Zydus is available at P/E of 30.00 and 22.10 of its
FY12E and FY13E earnings respectively. This expensive valuation is justified
considering the niche segment it caters to.
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