Zydus Wellness –Hold- Sharekhan
The net sales grew by 36.1% year on year (yoy) to Rs87.3 crore (ahead of our expectation of Rs80.2 crore) on the back of the strong performance of the company’s pillar brands (Sugar Free, Everyuth and Nutralite) and the new variants recently launched.
Sugar Free continues to dominate the market while the Everyuth range of products (Golden Glow peel off mask, face scrubs and face washes) maintained their respective market share during the quarter. The Menz range of skin care products continued to gain new grounds. Also, Nutralite (substitute for butter) registered a good performance in the retail as well as the institutional segment.
The company’s other expenses stood at Rs46.0 crore in Q1FY2011 as against our expectation of Rs32.1 crore for the quarter. Of the total other expenses, the advertisement cost stood at Rs30 crore during the quarter. The advertisement cost grew by 36.4% yoy on account of higher ad-spends and promotional activities towards the existing products and the launch of new products/variants during the quarter. Also, the other expenses (excluding the advertisement expenses) grew by 25.0% y-o-y during the quarter.
Thus, the operating profit margin (OPM) stood at 11.6% in Q1FY2011 as against our expectation of 24.1%. The operating profit grew by 46.1% y-o-y to Rs10.2 crore (lower than our expectation of Rs19.3 crore), in line with the higher sales growth during the quarter. Consequently, the adjusted net profit stood at Rs7.7crore as against our expectation of Rs13.5 crore for the quarter. We have slightly tinkered our estimates upwards to factor in the higher than expected top line growth.
The company has maintained its thrust on enhancing its product portfolio with the launch of new products/variants and expanding its reach through increased distribution. Thus, we expect the strong growth momentum to continue in the coming quarters. Also, along with the strong top line growth, the lowering of the tax rate due to the commencement of the new facility (in the tax-free zone Baddi) as per schedule will result in a strong growth in the bottom line. Thus, we expect the company’s bottom line to grow at a compounded annual growth rate (CAGR) of 43.1% over FY2010-12.
Zydus Wellness, with its strong product portfolio and presence in niche segment, is expected to achieve a strong earnings growth that will be ahead of the growth of fast moving consumer goods (FMCG) peers. The FMCG sector, on an average, is currently trading at 22x its FY2012 earnings and we believe with its strong earnings growth potential Zydus Wellness should command valuations in line with that of its FMCG peers.
Thus, valuing the stock at 22x its FY2012E EPS of Rs24.5, our revised price target stands at Rs538. At our price target the stock will trade at comfortable valuation of 0.5x price earnings growth (PEG). However, we maintain our HOLD recommendation on the stock due to the limited upside from the current levels. At the current market price the stock trades at 29x its FY2011E EPS of Rs16.8 and 19.9x its FY2012E EPS of Rs24.5.
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