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Zydus Wellness Q3FY14 results update

February 7, 2014, Friday, 18:50 GMT | 14:50 EST | 00:20 IST | 02:50 SGT
Contributed by Nirmal Bang


Zydus posted a subdued quarter in terms of Net Sales/Gross Profit/EBITDA growing 1.4%/4.9%/1.1% YoY respectively. Despite gross profit reported low single digit growth, gross margin improved by 230bps YoY to 68.6%, though it was down by 140bps QoQ. APAT registered a growth of 18.6% YoY to Rs. 26.8cr and by 6.2% QoQ.
 
Single digit revenue growth disappoints: Net Sales for Q3FY14 registered a single digit growth of 1.4% YoY to Rs. 97.2cr and flat QoQ mainly led by subdued performance by Everyuth and Nutralite.
 
High Double digit growth in Sugarfree, however continued poor performance by EverYuth and Nutralite dragged the overall quarter: Sugarfree reported a revenue growth in high double digit growth plus segment has maintained market share of 94% in Q3FY14. But continued slowdown in EverYuth and Nutralite resulted into the weak quarter for the company. The EverYuth category continues to face heat from the increase in activities from the MNCs plus extended monsoon season also impacted the category as it is meant for summer season. Further, EverYuth face wash has lost market share. As per management, the company has started taking some corrective actions which will result into improvement into the overall category from FY15E onwards. In addition, Nutralite continue to face increase in competition from the Amul Lite segment.
 
EBITDA margin declined YoY but improved sequentially: EBITDA margin was down by 10bps YoY to 27.6% in Q3FY14 and improved by 130bps QoQ. The decline in margin is mainly attributed to low single digit revenue growth and substantial jump in Other expenses as a % of sales. The advertisement expenditure was 13.8% as a % of sales in Q3FY14 as against 15.3% in Q3FY13 and 17.2% in Q2FY14. Excluding advertisement expenditure, EBITDA margin was down by 150bps to 41.4% in Q3FY14 and by 210bps QoQ. Gross margin stood at 68.6% in Q3FY14 as against 66.3% in Q3FY13 and 70% in Q2FY14.
 
APAT up 18.6% YoY: With the lower effective income tax rate at 9.9% in Q3FY14 as against 21.8% in Q3FY13 and 12.2% in Q2FY14 plus jump in Other income by 15.8% YoY, led growth in APAT by 18.6% YoY to Rs. 26.8cr and by 6.2% QoQ. PAT margin was up by 400bps YoY to 27.6% in Q3FY14 and by 170 bps QoQ.
 
 
Valuation & Recommendation
 
Despite high double digit growth in Sugarfree, the company has grown in low single digit YoY due to the continued tough competition from MNCs lowered the growth in EverYuth, and low sales of Nutralite dragged the overall performance during Q3FY14. Management has guided that the company is planning to launch couple of new variants in the existing product category in the near term and has also hinted that it is on the verge of launching new product category which will be in the same line of existing wellness category. With the consecutive poor quarterly result, we have further tweaked our Net Sales by 4.9% FY14E and 8.3% FY15E. At CMP of Rs. 504, stock is trading at a PE of 19.1x in FY14E and 17.4x in FY15E. We continue to recommend a HOLD rating and reduced our target price of Rs. 568 per share (PE 20x FY15E) from earlier Rs. 602 per share.

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