Zydus Wellness Ltd

Stock Opportunities
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Edelweiss has released an initiating coverage report on Zydus Wellness (attached).
Zydus Wellness - IC - Edelweiss.pdf (3.9 MB)

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If anyone has gone through the recent Quarterly results, what do you make of it?

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Zydus Wellness (ZWL) reported mixed results with 9.3% growth in gross sales led by strong growth in Sugarfree, Nycli & revival in Everyuth. Net sales grew at slower 4.8%, mainly as GST related benefits for one of the plants expired in January 2020. Gross margins fell 300 bps, mainly due to expiry of GST benefits, utilisation of high priced milk inventory & 10% increase in palm oil prices. The company held high cost inventory of skimmed milk powder (SMP) in February-March. However, advertisement spends to sales & other overhead spends to sales were down 182 bps & 58 bps, respectively, which partially offset the contraction in gross margins. Operating margins contracted 142 bps to 7.9%. The company raised 650 crore through QIP for early re-payment of debt. ZWL redeemed non-convertible debentures (NCDs), which led to extraordinary spend of 98 crore as premium for early redemption. This led to net loss of 105 crore. Adjusting for extraordinary spend, loss was at 7.9 crore vs. 4.5 crore in corresponding quarter.

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This is the first brand extension beyond low calorie sweeteners by Sugar Free since its launch in 1988. This new category launch will also help to consolidate Zydus Wellness’s position as a company reimagining health and wellness in a holistic manner.
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The new Sugar Free D’lite dark chocolates have a zero added sugar advantage & are sweetened using natural sweeteners. They are available in four exquisite and rich variants – Dark Rich Cocoa, Dark Zesty Orange, Dark Hazelnut flavor with roasted almonds and Dark Crispy Quinoa with roasted almonds. And all the chocolates have a minimum of 50% cocoa.
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SugarFree D’lite dark chocolates will be a Digital first brand & will be available across all the key Ecom portals like Amazon, Flipkart, Big Basket & Grofers.

Seems to be getting good positive response.

https://www.amazon.in/dp/B08K3GYPW1/

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Dark chocolates have very little sugar. Infact dark chocolate lovers who like bitter cocoa like usually 70% cocoa or more. While chocolate extension looks good, not sure why they chose the category within chocolate which is least sugar content…maybe because dark chocolate is associated with healthy food…Anyways they will get buyers who just buy sugar-free thinking it’s healthy…

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Quite premium pricing, seems higher than ITC’s Fabelle too… At that price point, Indian’s are still too much foreign brand lovers and for chocolate i believe its Hersheys’.
For the majority, Amul has one of the best products for India in chocolates…

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The target consumers of Sugar Free D’lite Dark Chocolate are different, it seems. It is Dark Chocolate with added artificial sweeteners. To my knowledge, there is no competition from domestic or global brands in this category. Target consumers are fitness buffs.

These chocolates have min 50% Cocoa, and so not in the bitter chocolate category.

I believe they chose this category for two reasons:

  • It is targeted as a healthy food which you rightly pointed out.
  • Most importantly, since artificial sweetener is added which actually taste somewhat different from Sugar, so sweet chocolates made in this way might taste somewhat awkward and so may not appeal consumers.

I have a gut feeling that they might attempt to launch healthy normal chocolates (added nutrients) through Complan brand extension.

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52

Has the concall after the Q3 results taken place? If not, when is it scheduled for?

Apologies for my ignorance.

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Hi,

Thanks,
Deb

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54

Hi,

Thanks,
Deb

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55

Interesting! They could’ve just promote their Sampriti Ghee brand. However, it seems that the low brand recall of Sampriti Ghee in the consumer space is the reason they decided to launch consumer Ghee through their Nutralite brand which is already well known for Healthy butter spreads. Sampriti Ghee is mainly a B2B product and now it seems that it will remain in that way only.

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56

Hi,

The VANGUARD GROUP INC has done a bulk deal on 19th march and bought 393492 shares at the price 1862.8

image
image1149×181 13.4 KB

Thanks,
Deb

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57

Hi,

Zydus ropes in Pankaj Tripathi for Glucon-D add.
I think company is doing good spending in advertisement to revitalize these good old brands like Glucon-D and Complan.

Thanks,
Deb

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58

Hi,

Zydus Wellness declares positive results.
Below are some highlights/

Reported revenue / EBITDA / recurring PAT grew by 24% / 39% / 85% YoY driven by strong performance of double-digit growth in most of the consumer brands Except Glucon-D due to delay in onset of summer.

Gross Margin expanded by 70 bps to 54.6% of sales due to deflation in milk prices and better product mix.EBITDA margin expanded higher by 260bps to 24% despite significant step-up in ad-spends.

Interest cost declined 75.5% in Q4 with repayment of more than Rs. 900 crore debt after raising funds through QIP. This led to PAT growth of 91.8% to Rs. 133 crore.

Declared a dividend of 5 rupees per share.

Thanks,
Deb

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Another one by ICICI Securities around the same time.

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Hi,

Quarterly results are out.

Significant improvement on YOY basis.
E-commerce and international business now contributes approximate 7 percent and 5 percent of the total net sale.

Thanks,
Deb

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anyone tracking this, 37.5% drawdown from the top, no sight of any base formation, what is the bull case here ?

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This was a good strategic move considering they end up producing ghee as by-product of milk processing for Complan.

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Was going through the company’s q3 concall. Q4 guidance is good.

I have a feeling that the company’s stock price may be close to bottoming out.

Disc: initiated a tracking position at Rs 1510

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65

I agree with the above points on the disparity in the share price movement and what seems to be positive indications from the conference call, and took up positions today in the company.

I think positives on the company including brand strength and market leadership where they operate, distribution strength is already well covered above. Amazon reviews for most of their products I checked are very good, indicating a good consumer acceptance.

In addition to these, certain key points stood out for me from the latest conference call which I think are positives for next year.

  • The base is quite affected by COVID and should see normalcy coming in this year. This is a business leaning towards seasonality, and Q4 and Q1 are especially important in terms of both sales and margins. Q1 especially has been impacted significantly both in 2020 and 2021.

  • The channel mix leans towards General Trade (>60%) and Others (>20%), again both affected especially for discretionary products in the base years. HORECA forms a healthy part of others as per the conference call (~50%). A natural pick up in these channels should as it is give some tailwinds.

  • The company points towards commodity headwinds - this also reflects in the current margins. Management response to this was satisfactory in my opinion though - being market leaders they could take 2 price hikes last year to address this, the last one was in December’21 itself.

  • I personally really like the NPDs being launched. The chocolate spread (Nutralite) is a product which could see a long growth runway. Everyuth’s new packaging looks good and the response has also been good for the product.

  • For what seems to be a good quality FMCG with a good runway for growth ahead, current valuations of ~31 TTM PE do not look demanding at all

  • If commodity headwinds ease out slightly, price increases come into the mix and sales pick up with existing fixed costs, there should be some operational leverage coming in with growth which should positively impact ROCE in the long term

Key monitorables for me:-

  • Can they deliver on the 1 lac+ outlets distribution expansion they talk about in the next year? Seems quite ambitious

  • Would be interesting to see what they do going ahead in the personal care space especially looking at the success of Everyuth

Disclosure : Invested today. Not a registered advisor, biased.

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