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Recommendations India

Zydus Wellness Q4FY14 results update

May 23, 2014, Friday, 12:57 GMT | 08:57 EST | 17:27 IST | 19:57 SGT
Contributed by Nirmal Bang

Zydus posted a subdued quarter in terms of Net Sales/EBITDA/APAT declined by 1.8%/33.4%/41.8% YoY respectively. Despite Gross profit reported low single digit growth of 0.5% YoY, Gross margin improved by 130bps YoY to 68.6%, though it was flat QoQ.

Decline in revenue growth YoY: Net Sales for Q4FY14 registered a decline by 1.8% YoY to Rs. 101.1cr and up by 4% QoQ mainly led by subdued performance by EverYuth and Nutralite.

Sugarfree registered growth, however continued poor performance by EverYuth and Nutralite dragged the overall quarter: Sugarfree reported a revenue growth plus segment has maintained market share of 93% in Q4FY14. 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 MNCs plus extended winter season also impacted the category as it is meant for summer season. Further, EverYuth face wash has lost market share. In addition, Nutralite continue to face increase in competition from the Amul Lite segment. As per management, the company has started taking some corrective actions (launch of new products in the face pack, face wash and face peel under EverYuth and Nutralite yummy, low calorie variant) which will result into improvement into the overall category from FY15E. Actilife is still on a developing stage and yet to contribute meaningfully to the top-line.

EBITDA margin declined led by higher advertisement cost: EBITDA margin was down by 950bps YoY to 19.8% in Q4FY14 and by 780bps QoQ. The decline in margin is mainly attributed to decline in revenue growth and substantial jump in advertisement and employee expenses as a % of sales. The advertisement expenditure was 19% as a % of sales in Q4FY14 as against 9.6% in Q4FY13 and 13.8% in Q3FY14. Excluding advertisement expenditure, EBITDA margin was marginally down by 10bps to 38.8% in Q4FY14 and by 260bps QoQ.

APAT down by 41.8% YoY: Despite decline in depreciation cost and jump in Other income, the APAT was down by 41.8% YoY to Rs 21.8cr in Q4FY14 and by 18.7% QoQ. The jump in tax rate which stood at 8.5% in Q4FY14 as against tax write-back of Rs 5.1cr in Q4FY13 plus decline in net revenue attributed to the fall in the profitability of the company. PAT margin was down by 1480bps YoY to 21.5% in Q4FY14 and by 610 bps QoQ.

Valuation & Recommendation

Despite growth in Sugarfree, the company has resulted into the decline in revenue YoY due to the continued tough competition from MNCs, lowered the growth in EverYuth, and low sales of Nutralite dragged the overall performance during Q4FY14. The company has launched couple of new variants in the existing product category in Q4 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 in the coming quarters. We have introduced FY16E numbers. At CMP, stock is trading at a PE of 19.9x in FY15E and 17.9x in FY16E. We roll-over our target multiple to 20x FY16E with a TP of Rs 572 per share and maintain HOLD.