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Recommendations India

Zydus Wellness Q1FY15 results update

July 22, 2014, Tuesday, 11:10 GMT | 07:10 EST | 15:40 IST | 18:10 SGT
Contributed by Nirmal Bang

Zydus again posted a subdued quarter in terms of Net Sales/EBITDA/APAT which declined by 6.5%/10.1%/25.0% YoY respectively. Gross profit also declined by 4.2% YoY though Gross margins improved by 155bps YoY to 72.1%.

Decline in revenue: Net Sales for Q1FY15 flat at Rs. 107.5cr and up by 4% QoQ mainly due to lost pipeline opportunity. The company is undergoing a change on “go-market” activity under which it is consolidating its distribution network. Direct towns have been completed and indirect towns would be streamlined till Aug’14.

Sugar Free: ZWL has maintained its share of 93% in the category, which is growing at a CAGR of 17%. During Q1FY15 (effective from 1st june’14) the company has taken price hike in Sugar free gold

Everyuth: Skin care category continues to remain under pressure however its recent launch “Tulsi & Turmeric” face wash has received positive response from the market and which helped the company in garner 0.2% market share in 2 months, which is commendable considering the overall 2.8% market share of ZWL in the category.

Nutralite: The margarine category is not growing and being the market leader ZWL is also not currently spending much on it. The company is facing competition on institution business (which accounts for 70%) from unorganized segment as is a price sensitive market. Hence the company has taken price cut during the quarter which is likely to help the company in long run. It would launch nutralite premium in retail segment in Q3.

EBITDA margin declined led by one-time cost: EBITDA has declined by 10.1% YoY to Rs 15.4cr and EBITDA margin was down by 66 bps YoY to 15.3% in Q1FY15 and by ~450bps QoQ. The decline in margin is mainly attributed to one-time expense which the company has incured to streamline its distribution network. It has also provided distributor subsidy effective for 12-15 months to compensate and motivate the distributors. Adjusting for same, EBITDA would have increased by 11% YoY.

APAT down by 25% YoY: Despite jump in Other income (Rs 6 cr v/s Rs 3.8 cr in Q1FY13 and Rs 5.6 cr in Q4FY14), the APAT was down by 25% YoY and 21.6% QoQ to Rs 17.05cr. Tax rate has increased to 10.2% in Q1FY15 as against 8.5% in Q4FY14 and write-back in Q1FY13. Therefore, PAT margin was down by 423bps YoY and 460 bps QoQ to 16.9% lowest in last 2 years.

Management changes: Dr Shravil Patel (Pankaj Patel's son), has been appointed as Chairman of the company

Valuation & Recommendation

Due to ongoing restructuring in distribution channel, the company has witnesses decline in sales which is expected to normalize from only Q3 onwards. At CMP, stock is trading at a PE of 22.2x/20.0x of FY15E and FY16E earnings respectively. Considering better 2HFY15 and positive outlook about FY16 we have assigned a multiple of 22x on FY16E earnings which translates into Target Price of Rs 630 per share. We maintain HOLD.