9 February 2015

India | FMCG

Quarterly Update/Target price change

Global Markets Research

Zydus Wellness
Bitter sweet

Rating: Sell

All round disappointing results

Target Price: INR 646

Downside: 24%
CMP: INR 846 (as on 9 February 2015)

Zydus Wellness (ZYWL IN) results were worse than expected. Sales
grew by a mere 12.2% with Sugar Free and Everyuth sales increasing
~10% YoY and Nutralite in the mid teens to our calculations. A 47%
rise in A&P spend and higher other expenses led to EBITDA margin
falling by 471bp. Core EBITDA fell by 7.0% and adjusted PAT by 2.4%.
Key takeaways from the conference call with management
1) The company got excise tax credits on lower tax on the Sikkim
facility, which led to a pre-tax, one-time gains of INR 201mn for the
past 3.5 yrs. The excise rate hereafter will be ~5.0% from 6.2%, 2)
artificial sweetener category growth slowed to 9.7%; Sugar Free
retained a share at 92%. As Sugar Free Golds price was increased by
~6% in June 2014, volume growth for Sugar Free was a meager ~5%
in Q3. The company has launched the stevia variant in Gujarat, 3) the
newly launched face washes (3-in-1 Neem and Tulsi Turmeric) helped
it preserve a 2.5% market share, which dropped from 13% three years
ago. The scrubs category grew by 10%, with Everyuth maintaining a
market share of 31%. The peel-off category sales where Everyuth has a
91% share contracted 6.7%. New variants are planned under Everyuth
soon, 4) as competition remains intense and RM cost corrected,
Nutralite price in the institutional segment was cut by 8%. We have
low hopes, given price-led competition with no differentiation on
Nutralites prospects, and 5) distribution restructuring that finished in
August 2014 has not led to significant gains until now, management
believes it will yield sizeable gains, ie improve sales growth from FY16.

Key data
Bloomberg /Reuters Code
Current /Dil. Shares O/S (mn)
Mkt Cap (INR bn/USD mn)
Daily Vol. (3M NSE Avg.)
Face Value (INR)

ZYWL IN/ZYDS.BO
39/39
33/532
68,823
10

1 USD = INR 62.1

Note: *as on 9 February 2015; Source: Bloomberg

Price & Volume

1,000

1.0

900

0.8

800

0.6

700

0.4

600

0.2

500
400

0.0

Feb-14

Jun-14

Oct-14

Vol. in mn (RHS)

Feb-15

Zydus Wellness (LHS)

Source: Bloomberg

Shareholding (%)

Q4FY14 Q1FY15 Q2FY15 Q3FY15

Promoter

72.5

72.5

72.5

72.5

Institutional Investors

15.7

14.6

15.2

14.7

Other Investors

3.2

3.9

3.8

4.4

Valuation reiterate Sell with a new TP of INR 646

General Public

8.5

8.9

8.5

8.4

While the stock price has run-up in anticipation that Zydus Wellness
should see strong growth in sales on a sustained basis as the
distribution restructuring shows effect, our distributor channel checks
do not suggest so. We expect low and volatile growth for the
company to continue as we do not see its products except Sugar Free
to show good growth. We retain Sell with a revised TP of INR 646 from
INR 584 on 20x FY17E P/E as we roll forward to FY17E earnings.

Source: BSE

YE March (INR mn)

Net Sales
Operating Expenses
% of Sales
EBITDA
EBITDA Margins (%)
Other Income
Interest
Depreciation
PBT
Tax
Effective Tax Rate (%)
Minority interest
Adjusted PAT
Reported PAT
NPM (%)

Q3FY15
1,092
843
77.2
249
22.8
68
19
298
27
9.2
9
261
444
23.9

Q3FY14
973
706
72.5
268
27.5
47
11
303
30
9.9
5
268
268
27.5

YoY (%)
12.1
19.4
(7.0)
45.2
69.9
(1.8)
(9.0)
(2.4)
65.9

Price performance (%)

3M

6M

12M

Sensex

1.3

11.4

38.5

Zydus Wellnes

37.8

40.2

71.9

Jyothy Labs

21.7

67.3

43.0

Source: Bloomberg

Q2FY15
1,030
772
75.0
258
25.0
67
19
306
27
9.0
5
273
273
26.5

QoQ (%)
5.9
9.1

Q3FY15E
1,105
796
72.1
308
27.9
65
20
353
35
10.0
6
312
312
28.2

(3.5)
1.6
(0.5)
(2.6)
(0.3)
(4.3)
62.7

Variance (%)
(1.2)
5.8
(19.2)
4.8
(4.0)
(15.7)
(22.7)
(16.2)
42.4

Source: Company, Elara Securities Estimate

Key Financials
YE
Revenue
YoY
EBITDA
EBITDA
Adj PAT
March
(INR mn)
(%)
(INR mn) margin (%)
(INR mn)
FY14
4,036
4.0
895
22.2
911
FY15E
4,245
5.2
871
20.5
940
FY16E
4,747
11.8
987
20.8
1038
FY17E
5,506
16.0
1175
21.3
1263
Note: pricing as on 9 February 2015; Source: Company, Elara Securities Estimate

YoY
(%)
-6.3
3.2
10.5
21.6

Fully DEPS
(INR)
23.3
24.1
26.6
32.3

RoE
(%)
33.1
26.4
24.7
25.5

RoCE
(%)
31.1
26.1
24.4
25.2

P/E EV/EBITDA
(x)
(x)
36.3
33.9
35.2
34.9
31.8
29.6
26.2
24.3

Aashish Upganlawar aashish.upganlawar@elaracapital.com +91 22 6164 8546

Saiprasad Prabhu saiprasad.prabhu@elaracapital.com +91 22 6164 8518
Elara Securities (India) Private Limited

Zydus Wellness

Financials (YE March)

FY17E

4,747
987
264
1,250
82
1,168
1,168
109
21
1,038
1,038

5,506
1,175
342
1,517
86
1,432
1,432
143
26
1,263
1,263

FY14

FY15E

FY16E

FY17E

391
2,865
47
53
3,356
1,161
206
954
2,568
(427)
260
3,356

391
3,485
66
1
53
3,995
1,211
285
926
3,070
(395)
394
3,995

391
4,157
87
1
53
4,689
1,271
366
904
3,650
(407)
543
4,689

391
4,963
113
1
53
5,521
1,321
452
869
4,400
(462)
714
5,521

Cash Flow Statement (INR mn)

FY14

FY15E

FY16E

FY17E

Cash profit adjusted for non cash items

Add/Less : Working Capital Changes
Operating Cash Flow
Less:- Capex
Free Cash Flow
Financing Cash Flow
Investing Cash Flow
Net change in Cash

820
(91)
911
54
857
(275)
(634)
2

753
22
731
50
681
(434)
(287)
10

857
(54)
911
60
851
(493)
(377)
42

1,006
(35)
1,041
50
991
(603)
(458)
(20)

Ratio Analysis

FY14

FY15E

FY16E

FY17E

4.0
(7.3)
(6.3)
22.2
23.9

5.2
(2.7)
3.2
20.5
22.1

11.8
13.3
10.5
20.8
21.9

16.0
19.1
21.6
21.3
22.9

(0.8)
33.1
31.1

(0.7)
26.4
26.1

(0.8)
24.7
24.4

(0.8)
25.5
25.2

23.3
(6.3)
6.0
36.3
33.9
8.2
10.2
2.8
0.7

24.1
3.2
7.0
35.2
34.9
7.8
8.5
2.2
0.8

26.6
10.5
8.0
31.8
29.6
7.0
7.3
2.9
0.9

32.3
21.6
10.0
26.2
24.3
6.0
6.2
3.5
1.2

Balance Sheet (INR mn)

Share Capital
Reserves
Minority Interest
Borrowings
Deferred Tax (Net)
Total Liabilities
Gross Block
Less:- Accumulated Depreciation
Net Block
Add:- Capital work in progress
Investments
Net Working Capital
Other Assets
Total Assets

Income Statement Ratios (%)

Revenue Growth
EBITDA Growth
PAT Growth
EBITDA Margin
Net Margin
Return & Liquidity Ratios
Net Debt/Equity (x)
ROE (%)
ROCE (%)
Per Share data & Valuation Ratios
Diluted EPS (INR)
EPS Growth (%)
DPS (INR)
P/E (x)
EV/EBITDA (x)
EV/Sales (x)
Price/Book (x)
FCFF yield (%)
Dividend Yield (%)

Revenue & margin growth trend

6,000

24
22.2

5,000

20.5

4,000

21.3

20.8

22
(%)

FY16E

4,245
871
265
1,135
78
1,057
1,057
98
19
940
940

20

3,000
2,000

18

FY14
FY15E
Net Revenues (LHS)

FY16E FY17E
EBITDA Margin (RHS)

Source: Company, Elara Securities Estimate

Adjusted profit growth trend

21.6

1,400
1,200

25
20

10.5

1,000

800

15

10

3.2

600
400

5
0

(6.3)

200

(%)

FY15E

(INR mn)

FY14
4,036
895
189
1,084
47
1,038
1
1,036
107
19
911
54
965

Net Revenues
EBITDA
Add:- Non operating Income
OPBIDTA
Less :- Depreciation & Amortization
EBIT
Less:- Interest Expenses
PBT
Less :- Taxes
Minority Interest
Adjusted PAT
Add/Less: - Extra-ordinaries
Reported PAT

(INR mn)

Income Statement (INR mn)

(5)

(10)

FY14

FY15E

Adjusted PAT (LHS)

FY16E

FY17E
PAT Growth (RHS)

Source: Company, Elara Securities Estimate

Return ratios
35

30

33.1

31.1

26.4

24.4
25

26.1

24.7

25.5
25.2

20
FY14

FY15E
ROE (%)

FY16E
FY17E
ROCE (%)

Source: Company, Elara Securities Estimate

Note: pricing as on 9 February 2015; Source: Company, Elara Securities Estimate

Elara Securities (India) Private Limited

Zydus Wellness
Exhibit 1:
YE March (%)

Q3FY15

Q3FY14

YoY bps chg

31.6

31.6

(1)

30.3

7.4

7.7

(26)

8.7

ASP Expenses

18.1

13.8

425

Other Expenses

20.3

19.5

72

Effective Tax rate

9.2

9.9

Gross Margin

68.4

OPM
NPM

Raw Material Cost

Staff Costs

Q2FY15 QoQ bps chg

Q3FY15E

bps variance

130

31.0

60

(123)

8.6

(119)

17.6

47

14.5

353

18.6

164

18.2

211

(72)

9.0

21

10.0

(82)

68.4

69.7

(130)

69.0

(60)

22.9

27.6

(471)

25.1

(225)

28.0

(513)

24.0

27.6

(357)

26.6

(259)

28.3

(434)

Exhibit 2: Change in estimates

Old Estimates

New Estimates

(%) change

(INR mn)

FY15E

FY16E

FY17E

FY15E

FY16E

FY17E

Revenue

FY15E

FY16E

FY17E

4,315

4,923

5,724

4,245

4,747

5,506

(1.6)

(3.6)

(3.8)

EBITDA

988

1,123

1,284

871

987

1,175

(11.8)

(12.1)

(8.5)

EBITDA (%)

22.9

22.8

22.4

20.5

20.8

21.3

(237)bp

(202)bp

(109)bp

1,025

1,159

1,376

940

1,038

1,263

(8.3)

(10.4)

(8.2)

26.2

29.7

35.2

24.1

26.6

32.3

(8.3)

(10.4)

(8.2)

PAT
EPS (INR)

FMCG

Source: Company, Elara Securities Estimate

Source: Elara Securities Estimate

10

0
(2)

(10)

(6)

(17)
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15

(20)

Source: Company, Elara Securities Research

Elara Securities (India) Private Limited

31
36

34

25
1922
9
28
10
31
33
16
17
27
15
28
13
29
31
16
17 26
14
28
19
20
27
15
18 25
18 23

4 4

14

4 5

14

10

23 21 22

20

40
35
30
25
20
15
10
5
0

22
23

27 28

Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15

% yoy

30

36

% to sales

40

Exhibit 4: Advertising and EBITDA margin trend

12

Exhibit 3: Sales growth trend

Advertising/ sales

EBITDA margin %

Source: Company, Elara Securities Research

Zydus Wellness

Coverage History
1,000
900

800
2
700

1
3

600

5
6

500
400

Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15

300

Not Covered

Date

Rating

Target Price

Closing Price

28-Jun-2013 Accumulate

INR 729

INR 639

15-Jul-2013

Accumulate

INR 765

INR 711

13-Aug-2013 Accumulate

INR 605

INR 575

04-Oct-2013 Accumulate

INR 571

INR 529

31-Oct-2013 Sell

INR 491

INR 565

18-Feb-2014 Sell

INR 441

INR 468

5-Jan-2015

Sell

INR 584

INR 805

9-Feb-2015

Sell

INR 646

INR 846

Covered

Guide to Research Rating

BUY

Absolute Return >+20%

ACCUMULATE

Absolute Return +5% to +20%

REDUCE

Absolute Return -5% to +5%

SELL

Absolute Return < -5%

Elara Securities (India) Private Limited

Elara Securities (India) Private Limited

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Global Markets Research

Disclosures & Confidentiality for non U.S. Investors

Any clarifications / queries on the proposal as well as any future communication regarding the proposal should be addressed
to Elara Securities (India) Private Limited / the company.

Disclaimer for non U.S. Investors

The information contained in this note is of a general nature and is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
No one should act on such information without appropriate professional advice after a thorough examination of the
particular situation.

Elara Securities (India) Private Limited

Disclosures for U.S. Investors
The research analyst did not receive compensation from Zydus Wellness Limited.
Elara Capital Inc.s affiliate did not manage an offering for Zydus Wellness Limited.
Elara Capital Inc.s affiliate did not receive compensation from Zydus Wellness Limited in the last 12 months.
Elara Capital Inc.s affiliate does not expect to receive compensation from Zydus Wellness Limited in the next 3 months.

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Elara Securities (India) Private Limited

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Analyst

Banking & Financials

rakesh.kumar@elaracapital.com

+91 22 6164 8559

Ravi Menon

Analyst

IT Services

ravi.menon@elaracapital.com

+91 22 6164 8502

Ravi Sodah

Analyst

Cement

ravi.sodah@elaracapital.com

+91 22 6164 8517

Sumant Kumar

Analyst

Agri, Travel & Hospitality, Paper sumant.kumar@elaracapital.com

+91 22 6164 8503

Swarnendu Bhushan

Analyst

Oil and gas

swarnendu.bhushan@elaracapital.com

+91 22 6164 8504

Abhishek Karande

Analyst

Technical & Alternate Strategy

abhishek.karande@elaracapital.com

+91 22 6164 8562

Bhawana Chhabra

Sr. Associate

Strategy

Bhawana.chhabra@elaracapital.com

+91 22 6164 8511

Manuj Oberoi

Sr. Associate

Banking & Financials

manuj.oberoi@elaracapital.com

+91 22 6164 8535

Durgesh Poyekar

Associate

Oil and gas

durgesh.poyekar@elaracapital.com

+91 22 6164 8541

Harshit Kapadia

Associate

Power, Capital Goods

harshit.kapadia@elaracapital.com

+91 22 6164 8542

Saiprasad Prabhu

Associate

FMCG, Media

saiprasad.prabhu@elaracapital.com

+91 22 6164 8518

Sneha Poddar

Associate

Construction, Infrastructure

sneha.poddar@elaracapital.com

+91 22 6164 8526

Priyanka Sheth

Editor

priyanka.sheth@elaracapital.com

+91 22 6164 8568

Gurunath Parab

Production

gurunath.parab@elaracapital.com

+91 22 6164 8515

Jinesh Bhansali

Production

jinesh.bhansali@elaracapital.com

+91 22 6164 8537

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