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Zydus Wellness (NSE:ZYDUSWELL) is a leading consumer wellness company in India. It is one of the largest FMCG companies in the country. Zydus Wellness is a subsidiary of Cadila Healthcare or Zydus Cadila. Cadila Healthcare acquired a majority stake in the company in 2006 and subsequently transferred its consumer products division and renamed the company, Zydus Wellness.
Zydus Wellness has a large global footprint extending to over 20 countries and three continents. The company has five manufacturing facilities across four locations in India and eight co-packing facilities in India, Oman, and Newzealand. The company caters to more than 50 million families. It operates through a wide distribution network comprising ~1800 distributors, ~2000 feet-on-street representatives, and more than 18 lakh outlets.
Zydus Wellness Pros
i) Popular brands - With over three decades of operational excellence, Zydus Wellness has developed a collection of seven leading brands such as Complan, Sugar Free, Glucon-D, Everyuth, Nycil, Sugarlite, and Nutralite in its portfolio. Each of these brands has made a prominent place in Indian households. Its Sugar Free brand enjoys an undisputed category leadership with ~94% market share. Glucon D and Complan are category-leading brands with 98% and 90% product recall, respectively. Zydus Wellness is trusted for its quality and innovative products. The company got popular with the launch of India’s first zero calorie replacement of sugar, called Sugar Free, in 1988. It is the market leader in 5 of its 7 brands i.e. SugarFree, Everyuth Scrubs and Peels, Nutralite, Glucon D, and Nycil.
ii) A wide portfolio of innovative products - Zydus Wellness’s product portfolio includes a wide range of nutrition and cosmeceutical products. Its core areas are food and nutrition, beverages, and skincare. The company is engaged in the development, production, marketing, and distribution of health and wellness products. Its stellar products like Sugar Free, Everyuth Peel Off, Everyuth Scrub, Nycil, and Glucon D occupy the No. 1 market share position. Sugar Free has recently ventured into the premium dark chocolate category with the launch of Sugar Free D’lite chocolates. These will be available across all the key e-commerce portals like Amazon, Flipkart, Big Basket, and Grofers.
iii) Leading FMCG company with solid industry relations - Over the years, Zydus Wellness has formed an efficient network of customers and suppliers and works with over 2000 MSMEs as business partners. With more than three decades of experience in the consumer products industry, Zydus Wellness is well-positioned to adapt to the rapidly changing landscape of the Indian FMCG sector and cater to changing customer preferences. It spends a whopping ~13% of its sales on advertisement and promotions every year. The company’s focus on research and innovation has helped it stay ahead in the race. Zydus Wellness offers an integrated portfolio of iconic brands catering to diverse age groups. It is also rapidly expanding the reach of its brands in smaller towns. Increasing awareness about health, rising middle-class population, and growing income base should boost sales across Tier 2 towns and cities.
iv) Expanding International Footprint - Zydus Wellness’s subsidiaries include Liva Investment Limited, Liva Nutritions Limited, Zydus Wellness Products Limited, and Zydus Wellness International DMCC. It entered new markets like New Zealand and Kenya to build its international business and also launched new products in existing markets like UAE, Bahrain, Qatar, Mauritius Oman, Saudi Arabia, and Kuwait during the last year. The company is focusing on SAARC, MEA, and SEA markets for future growth opportunities. Zydus Wellness also rendered a 240% growth in e-commerce sales during the last quarter.
v) Should greatly benefit from the Integration of Heinz India - Though FY20 was the first full year after the consolidation of the acquired Heinz business, the results were not normalized given the prevailing COVID-19 disruption. But with the acquisition synergies, Zydus Wellness was able to optimize its cost. The Heinz acquisition has increased the addressable market size from ~Rs. 3,500 crores to ~Rs. 12,000 crores. The combined portfolio will now cater to a larger addressable customer base and have a higher penetration level.
COVID-19 Impact
Zydus Wellness launched nine new products despite COVID-19. It introduced Sugar Free Green, a 100% natural variant made from stevia, which offers an improved formulation and packaging and is specially made for health-conscious people. It also launched Nycil Hand Sanitizers during the lockdown. The company continued to strengthen its online presence and is increasing its visibility across e-commerce sites. The sales of FMCG on e-commerce sites are expected to keep growing in the future. Zydus Wellness is investing in managing e-inventories and supply chains and creating more efficient distribution channels for online sales.
Valuation
Zydus Wellness was listed on NSE in 2009 and has had a stellar performance as can be seen in the chart below. It currently has a market capitalization value of Rs.12,000 crores and is trading at ~63x its trailing earnings. Shares are trading near the Rs.1,800 mark and at 15% below the 52-week high price. The stock sports a PB value of 2.7x which appears to be higher than one’s liking. Also, the promoter holding has decreased by more than 7% in the last three years to 64.8% currently.
Source: Screener
Zydus Wellness maintains a healthy dividend payout of 20%. The company has a lean balance sheet and negative working capital requirements.
The company has registered a growth of 22%+, 21%+, and 17%+ CAGR each in total income from operations, EBITDA, and net profit in the last 12 years. The buyout of Heinz’s portfolio has resulted in total debt of Rs. 1,500 crores. However, Zydus Wellness paid down its debt by fully redeeming Non-convertible debentures of Rs.1500 crores and recorded a double-digit net sales growth of ~15% in the latest quarter.
Challenges
India is a large consumer market with many leading FMCG companies. Zydus Wellness faces extreme competition from existing players like GSK Consumer, Abbott, Emami, etc. as well as from new entrants. The company is very dependent on its top three brands - Glucon D, Complan, and Sugar Free and derives ~70% of its revenues from these leading brands.
Future Opportunities
The market for India’s FMCG sector is expected to cross USD 100 billion by 2020 and as a leading FMCG company, Zydus Wellness should greatly benefit from this growth opportunity. The FMCG Industry is forecasted to grow at 5% to 6% in FY2020. Given its extensive experience and country-wide reach, the company is favorably placed to enter new product categories in the future.
Bottom Line
Zydus Wellness is focusing on its core brands, M&A opportunities, and building a strong international presence for future growth. The pandemic situation has further emphasized wellness and good health in the minds of the people. Zydus Wellness should also benefit from rising e-commerce sales in the wake of the pandemic. It also has a healthy pipeline of products both for Indian and international markets. The company estimates to gain synergies of at least Rs. 40 crores from the Heinz acquisition in operational efficiencies. Zydus Wellness expects future growth to be driven by new and innovative product launches and from its stellar brands like Glucon-D, Complan, and Sugar Free.
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