Sharekhan  says that Zydus Wellness revenue grew by 24.2% yoy to Rs 606 cr in Q4FY2021, better than our expectation of Rs 537.5 cr. Except for Nutralite and Glucon D, all other brands registered high double-digit revenue growth during the quarter. Late start to season resulted in high single digit growth for Glucon D, while Nutralite sales (largely an institutional business) saw sequential improvement in sales, which reached pre-COVID levels in Q4. Despite firm palm oil prices, benign dairy prices and better revenue mix led to 71 bps improvements in the gross margins. Lower other expenses and employee cost drove up OPM by 256 bps to 24%. Five brands - Glucon-D, Sugar Free, EverYuth Scrub, Peel Off Face Mask and Nycil maintained their leadership positions in-their respective categories as of March 2021. Sharekhan has maintained a Buy rating on Zydus Wellness with a target price of Rs 2505.

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Sharekhan said that new products (NPD) are gaining good traction and now contribute around 3.5% of revenues as against 1% contribution two years back. The management is looking to increase NPD contribution to 5% over the next two years with a wider distribution network and addition of new products with the right value-proposition. Zydus Wellness direct distribution reach has increased to 5.5 lakh outlets from 3.5 lakh outlets earlier. Sugarfree Lite is growing by 2x and expected to scale up in the coming years. D Immuno volts and Nutralite Choco Spread are gaining strong traction in the domestic market. Globally, the company has entered into countries such as Nigeria and Taiwan. The business contributes around 3% of revenues and the company’s endeavour is to grow the contribution to 8% over the next two to three years through penetrating in key markets. The near-term outlook looks uncertain due to rising COVID cases, explains Sharekhan.

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However, Sharekhan added that Zydus Wellness is well prepared to take care of any supply shortage while the demand situation looks to be uncertain in the current environment. Improving penetration of Complan, higher traction for Sugarfree and Glucon D along with new products performing well and improved growth of Everyuth brand coupled with distribution enhancement will be key revenue drivers in the near term. The scale-up in the international business and some of the new launches becoming reaching maturity will improve the growth prospects in the long run.

Zydus Wellness has undertaken a relevant price hike in the Nutralite brand to pass on significant increase in palm oil prices and expects gross margins to remain stable in FY2022. However, they might improve if input prices soften supported by a better revenue mix. Benefits derived from integration of Heinz acquisition and cost saving measures would help OPM to improve in the coming years (target is to achieve OPM of 21-22% in FY2023), highlights Sharekhan.

Zydus Wellness Key positives:

Nycil and Everyuth Scrub gained market share by 225 bps and 174 bps in FY2021
Complan registered second consecutive quarter of double-digit revenue growth
Direct distribution reach went up to 5.5 lakh outlets in March 2021 from 3.5 lakh outlets

Zydus Wellness Key negatives:

Despite a seasonally strong quarter, Glucon D registered single-digit growth due to late start to the summer season.