Zydus wellness- acquisition of heinz india brands

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Zydus Wellness primarily has three brands and their variants/extensions in the Indian Market -

Sugarfree
Everyouth
Nutralite

Total sales and net profit data for year ending Mar 18 is as follows-

Total Sales- 512 cr
NP- 133 cr.

Now they are acquiring Heinz india brands ( for 4600 odd cr ), namely -

Complan
Glucon D
Nycil
Sampriti ghee

These Heinz brands have an ebitda of 225 cr…publically known.

So, conservatively- Heinz brands can clock NP of say130 cr…as they dont have any debt and minimal fixed assets.

Both zydus wellness and Heinz india brands that are being acquired are debt free.

But the combined entity is expected to have a debt of around 1000 cr…as Zydus is expected to take this on over and above the equity infusion and 500 odd cr of cash that it has on its books.

As per the company management, The total deal value of 4600 odd cr is gonna be financed by 2/3 rd equity ( say 3000 cr ) . Rest- cash + debt ( say 1500cr…out of which debt would be 1000 cr or so).

So that makes an annual interest outgo of say 100 cr.

So…in the end, NP of combined entity would be…133 + 130 -100 cr = 163 cr.
( roughly )

Giving the combined entity a PE multiple of 35…market cap of merged Merged entity should be- rs 163*35 = 5700 cr.

Present mkt cap of Zydus Wellness- 4500cr

So, potential upside= 22 pc ( but that doesnt always work so well in the markets )

With 10 pc, earnings growth…new profit of the merged entity = 180 cr ( aprox )

@ 35 PE…mkt cap should be - 180*35 = Rs 6300 cr.

So…potential upside = 30 pc ( now that’s juicy…and we are talking about FMCG sector…where price discovery is never a problem )

So…all in all…looks like a good deal.

Plus all these brands can easily grow 8-10 pc topline and 15-18 pc bottomline for some time to come.

So that is an added kicker.

So that’s the investment thesis.

Another angle-

Whenever a company tries to acquire a company/brand bigger than itself ( which is the case here ), the stock price gets beaten (look at Zydus Wellness ka share price ).

Naturally, one should be skeptical also.

But history shows us…an FMCG-FMCG marriage seldom fails.

In fact it generally works so well, that it can pay down a mountain of debt.( only applicable to established FMCG brands )

In this case…the debt burden is anyways not too big.

Biggest Concern -

Malted beverages ( like complan ) as a space, are not growing too well in India.

I have done some homework there. I have a different take here. It goes like this-

The mnc’s selling boost , horlicks, bournvita and complan in India have been lousy off late. They didn’t invest in these brands. Hence the avg to poor growth rates.

A new entrant…in an adjecant catageory…Abbott india brought in Pediasure ( having very similar value proposition ) and started selling it aggressively around 3-4 yrs back.

The result - its prominently avlb in all chemist shops across India and selling by tons…of course at the expense of traditional malt drinks.

So , if Pediasure is included in this category, the results are not bad at all.

Zydus…obviously thinks that it can take complan - the Pediasure way.

Specially when it has significant reach in the Chemist Channels.

So , that’s the logic.

Would love to hear from fellow members about their view points.

Disc: planning to initiate a starter position.

Regards,
Ranvir Dehal

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Of the 4 brands on offer only Glucon D is the market leader…but the bulk of the revenues must be coming from Complan out of the 4 brands

The MFD category where Complan belongs to is witnessing de-growth in India. Complan does well only in East India…where there used to be concern about supply of milk in the past but now its taken well care of…

With Horlicks also being put on the block and Coca Cola / Pepsi showing interest…it won’t be easy for Zydus to make much headway given that Horlicks is still the market leader…

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All the 3 acquired brands of Complan, Glucon-D, Nycil seem like declining brands. Revenue of Heinz India Pvt Ltd has declined from 1360crore in FY13 to 1185crore in FY18.

Since the current market is not milk deficient, preference is given to taste over nutritional value of products. Complan too will have to bring in attractive flavours like Horlicks and Bounvita if it has to make a comeback. I think if Zydus management tries to position Complan back as a nutritional drink and continue to charge pricing premium, the turnaround would be difficult. Zydus can very well use the Complan brand to launch new protein supplements and other value added nutritional products. Horlicks and Pediasure are currently leading players in premium malt based offerings but that is a niche market.

This is my reading of the malted drinks space and I could be wrong. I could not find much information about GluconD or Nycil.

Found one good article about how Heinz failed in India: https://www.outlookbusiness.com/strategy/feature/trickle-down-debacle-2225

Discl: Not invested.

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Thanks…@chetan187 and @Darkwanderer79 for sharing your views and posting this article.

But I had a few more thoughts. So I ll share them-

  1. If Nycil, Complan and Samriti were doing well, Heinz would have (in all probability ) not sold them. So, that point is well taken care of and therefore is well built in the price of Zydus Wellness ( in my opinion )

  2. As the article posted above brings out…at most places ( if not all ), it has always been the management failure ( or neglect…i m not sure…but either of the two…that i think i am reasonably sure of ) that they could not grow well established and entrenched FMCG brands. ( that takes some creativity ). But sometimes, MNCs show such creativity in India.

  3. Similar creativity was also on display by Henkel AG for over 10 odd years with its brands like - Pril, Margo and Henko…wherein they managed to drag them to the ventilator ( they were almost dead ) before Jyothy Laboratories bought them…sometime in 2012 if i m not wrong.
    Since then Pril and Margo are going great guns. Henko has also been
    doing fairly well. It just took some management aggression, brand re positioning and cost cutting …and all three revived. And then, Jyothy Labs became a mini- multi bagger…up multi-fold since acquisition. ( i have been holding it …he he)

    In this case, Nycil, Glucon D, Complan…are doing faily well. ( Henkel had almost killed its brands…all used to make heavy losses )

  4. Similar things ( not as dramatic though ) happened with Set Wet and Livon after Marico bought them from Reckitt Benckiser. ( I hold Marico as well )

  5. Emami did the same with some of Zandu brands. ( specially the Balms and Pancharishta )… I have a few shares of Emami ltd also.

So, I think…we need to look at things from this perspective as well.

Regards,
Ranvir Dehal

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The reason for Heinz letting go of Complan is to fund their acqquisition of Campbell Soups.

Let’s see how Zydus plans to market Complan…given the fact that most of the players are struggling in the segment.

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@ranvir will there be any equity infusion for this? If yes, have you adjusted your upside calculations taking that into account?

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Hi Rohit…

Thanks for asking this. I thought I did this calculation in my mind , but when I looked at it again, in fact I have not made proper adjustments.

Corrections -

Total no of shares today of FV 10 - 3.9cr.

Post issuance of of new shares at CMP , total no of shares would increase to
( company is planning to raise 2/3 rd of total acquisition cost of 4500 cr via equity ) - 6.5 cr shares.

Expected net profit of merged entity - Rs 180 cr

Expected EPS - 180 cr / 6.5 cr shares = Rs 27.7

Current market price - Rs 1150.

I think the market is estimating the merged entity’s market cap to go upto- 7500 cr aprox ( ie 6.5 cr which is total no of shares post dilution * Rs 1150 per share which is the cmp )

So…yes. there is an error in original calculation.
Really sorry for that.

NEW CALCULATION -

Merged entity’s EBITDA = Rs 350 cr ( from investor presentation )

New Market cap @ cmp and 6.5 cr shares ( after dilution ) - 7500 cr.

Market Cap/ EBITDA= 21.5 times

So, this is undervaluation by FMCG standards.

This I think is far simpler and accurate.(more importantly has no assumptions)

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Any idea why Heinz india retained ketchup and sold everything else?

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I would like to share some divergent views -

  1. Milk additives/ Malt drinks aren’t growing well. Fine. A lot of studies point towards that. But most of these studies conveniently ignore Pediasure…which is growing explosively…because of which others aren’t growing well.

Now Pediasure grew so well because they ( Abbott India ) started targeting the chemist/pediatrician channels…unlike Horlicks and Bournvita. Cadila ( Zydus’s parent ) …in all probability has similar intentions and is well entrenched in these channels.

Plus some smart brand extensions…like Junior Horlicks, Womens Horlicks…can go a long way.

By the way, GSK Cnsumer’s ( q2 profit is up more than 40% yoy …when 90 % of their revenues come from malt drinks )

  1. Complan in itself profitable and sells reasonably well in East and South India. Turning it around ( ie…6-10% topline growth and 15-17 % bottomline growth ) won’t be too hard… I m sure.

  2. Sampriti Ghee operates in a highly fragmented market. ITC and Patanjali would be aggressive here. But that cant be anything but good for the sub sector( packaged ghee in this case). It will help the organized market grow. Plus the market is so large, it can accommodate a few more players I would say.

  3. Glucon D is as such a market leader has should have no problems in growing with adequate management attention and some aggression.

  4. Nycil…if i am not wrong…is no 3 in a slow growing category. (Behind Dermi Cool and Navratna ). But is profitable and again suffers from only one problem…management neglect. Surprisingly, its already the leader in chemist channels. ( where Zydus specializes )

  5. In my opinion…Cadila Healthcare ( Zydus’s parent ) …shares my opinions ( he he …these are informed conjectures at best ) . So, this acquisition in my book may well end up being a sweet deal for Zydus Cadila.

  6. Plus the EV/EBITDA that zydus is paying to acquire these brands is in early 20s …difficult to go wrong from here ( ya…but its not dirt cheap by any stretch of imagination ) .

Disc: my views are biased as I ve bought some shares of Zydus Wellness.

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Pediasure is not owned by Abbott India but by Abbott Healthcare Pvt ltd and they are in to premium category which Complan and Horlicks does not fall into and market for Malt drinks is comparatively saturated

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Similar viewpoint here:

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Posting the latest development wrt the fund raising for acquisition of Heinz India’s brands -

This should give a lot of support to the stock price.

Disc: invested in Zydus Wellness

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I am very excited learning about this acquisition!

It would be interesting to see how they position Complan and ActiLife in their portfolio. Complan is usually promoted for Children and grown-ups, and ActiLife is for adults.

I hardly see ActiLife in our stores or malls (I live in Kolkata). I understand that Zydus can use the existing network of Heinz for Complan, but not sure how they can enhance its push through doctor connect when they are not so successful in doing that for ActiLife.

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Multiple threads on Zydus Wellness. So this thread is closed. Members are requested to move their content to the other thread. Creator of this thread is warned for creating multiple threads.

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