Zydus Wellness BUY - bsmedia.business-standard.com€¦ · Zydus Wellness BUY Leadership in niche...

Please refer to important disclosures at the end of this report

Market Cap Rs99bn/US$1.3bn Year to March FY19 FY20 FY21E FY22E

Reuters/Bloomberg ZYDS.BO/ZYWL IN Net Revenue (Rs mn) 8,428 17,668 18,039 20,058

Shares Outstanding (mn) 57.7 Net Profit (Rs mn) 1,796 1,859 2,637 3,806

52-week Range (Rs) 1904/1188 Dil. EPS (Rs) 31.1 32.2 41.0 59.2

Free Float (%) 32.1 % Chg YoY (9.1) 3.5 27.1 44.3

FII (%) 16.9 P/E (x) 55.0 53.2 41.8 29.0

Daily Volume (US$'000) 1,182 CEPS (Rs) 31.5 29.2 45.2 63.4

Absolute Return 3m (%) 34.1 EV/EBITDA (x) 49.2 28.3 28.2 25.0

Absolute Return 12m (%) 0.8 Dividend Yield (%) 0.3 0.3 0.6 0.8

Sensex Return 3m (%) 6.9 RoCE (%) 6.2 6.0 6.8 7.7

Sensex Return 12m (%) (2.6) RoE (%) 8.8 5.4 6.4 7.8

Equity Research September 24, 2020

BSE Sensex: 37668

ICICI Securities Limited is the author and distributor of this report

Initiating coverage

Consumer

Target price: Rs2,500

Shareholding pattern

Dec ‘19

Mar ‘20

Jun ‘20

Promoters 67.6 67.8 67.9 Institutional investors 24.9 24.8 24.4 MFs and other 3.2 3.7 3.9 Banks/FIs 2.7 3.0 3.6 FIIs 19.0 18.1 16.9 Others 7.5 7.4 7.7

Source: BSE

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Zydus Wellness BUY

Leadership in niche categories; initiate at BUY Rs1,714

Research Analysts:

Manoj Menon [email protected]

+91 22 6637 7209

Vismaya Agarwal, CFA [email protected]

+91 22 2277 7632

Karan Bhuwania [email protected]

+91 22 6637 7351

INDIA

We believe the acquisition of Heinz India business is transformational for Zydus

Wellness. The timing of the acquisition and the completion of integration could

not have been better, in our view, given the increased consumer focus on health

and wellness – likely accelerated consumer adoption of >70% of the portfolio

(Sugar Free, Glucon-D, Nutralite and Complan). We especially like the new

product development strategy aimed to address some key challenges – SugarLite

to address the taste penalty, Sugar Free Green is a natural product, Complan

Nutrigro to regain lost medical connect of the brand. Potential deleveraging is

likely to drive FCF generation faster. We initiate coverage with a BUY rating and

DCF-based target price of Rs2,500 (implied P/E of 42xFY22e).

Synergies from the integration of Heinz India business: We expect Zydus’

acquisition of Heinz India’s business to be value accretive driven by (1) Significant

scale advantages in both distribution network and media buying (Heinz business

revenue was Rs11bn and Zydus’ core business revenue was Rs5bn), (2) Cross

leveraging the distribution strength (using Chemist channel strength to accelerate

growth in Complan and Glucon-D) and (3) accelerate new product launches.

Consumer focus on health and wellness a tailwind for ~70% of the business:

The current pandemic, in our view, will result in faster adoption of health and

wellness products. We note >70% of Zydus’ portfolio stands to benefit from this

trend. We see benefits to (1) Sugar Free (for both health conscious consumers as

well as diabetics who are more aware of the risk from comorbidities), (2) Glucon-D

(innovation around immunity boosting), (3) Nutralite (providing a low-calorie

alternative to spreads) and (4) Complan (needs to gain market share).

New product development to be a key growth driver: We like Zydus’ focus on

new product development as a key growth driver across its portfolio. The company

has been on a spree of innovations over the past two years. SugarLite (healthier

sugar substitute, reduces the taste penalty), Sugar Free Green (relaunch in a

completely natural format), Complan Nutrigro (launched through pharmacy and

doctor recommendation – to regain the lost medical connect of the brand) and

Complan 75gm sachets (increase brand penetration) are some of the key launches.

Valuations and risks: We model revenue / EBITDA / PAT CAGR of 7% / 12% /

43% over FY20-22E – net profit to grow ahead of revenue and EBITDA driven by

deleveraging of balance sheet. Initiate at BUY with a DCF-based target price of

Rs2,500. At our target price, the stock will trade at 42x P/E multiple March-22E. Key

downside risks are delays or failures in new product development or an inability to

expand distribution network.

Zydus Wellness, September 24, 2020 ICICI Securities

2

TABLE OF CONTENT

Synergies from the integration of Heinz India business ............................................. 3

Health and wellness focus by consumers to accelerate growth for 70%+ portfolio 5

Leadership position in niche personal care categories ............................................ 10

New product development to improve penetration and recruit new customers ..... 12

Financial performance, assumptions, estimates........................................................ 14

Historical financial snapshot (10-year history) ........................................................... 18

Valuations and risks ...................................................................................................... 19

DCF assumptions .......................................................................................................... 19

Relative valuation .......................................................................................................... 21

Risks ................................................................................................................................ 22

Company description .................................................................................................... 23

Category and brand size ............................................................................................... 23

Management team ........................................................................................................ 24

Shareholding pattern ..................................................................................................... 25

Financials ........................................................................................................................ 26

Index of tables and charts ............................................................................................. 31


3

Synergies from the integration of Heinz India business

Zydus Wellness acquired Heinz India’s consumer business in January 2019, giving it

ownership of popular brands like Glucon-D, Complan and Nycil. The acquisition also

resulted in the transfer of two large manufacturing facilities (one in Aligarh and one in

Sitarganj), teams (operations, research, sales, marketing and support) and a network

of more than 800 distributors and 20,000 wholesalers in 29 states.

The acquisition cost of Rs46.7bn was funded through a mix of debt and equity. The

company raised Rs25.8bn by issuing 186mn shares on a preferential basis to Cadila

Healthcare (Rs11.8bn), Zydus Family Trust (Rs3.0bn), True North (Rs10.0bn) and

Pioneer Investment Fund (Rs1.0bn). This fresh issue was done at a share price of

Rs1,382. At the same time, Zydus also raised debt of Rs15.0bn by issuing 9.14%

secured, redeemable NCDs. The remaining funding was through internal cash.

Table 1: Source of funds for acquisition of Heinz India’s consumer business

Investor Source of funds Investment (Rs bn) % of acquisition cost

Cadila Healthcare Ltd. Equity 11.75 25

Zydus Family Trust Equity 3.00 6

True North Equity 10.00 21

Pioneer Investment Fund Equity 1.00 2

9.14% secured, Redeemable NCDs Debt 15.00 32

NA Internal Cash 5.95 13

Source: Company Data, I-Sec research

Integration of both businesses

Zydus has been successful in completing the integration of the two businesses and

bringing out synergies to the fore. The entire integration process was set around three

key transformations – sales, supply chain and IT systems.

Sales & distribution: The company embarked on a project to integrate the two

separate sales organisations (Project Udaan). Zydus Wellness has also rationalised its

distribution network, while at the same time expanded the reach. Zydus has increased

its direct reach to 0.3mn outlets and aims to increase it to 0.5mn by FY2021-end.

Supply chain: The company is also focused on improving the supply chain efficiency

during business integration. Due to the acquisition, the company’s carry and forward

agent (CFA) network increased to 65 (26 existing CFA, 19 acquired CFA and 20 cold

chain). In order to reduce logistics cost and streamline supply chain, Zydus reduced

this count to 23 CFAs.


4

Chart 1: Supply chain integration

26 Existing

Integrated Network

of 23 CFAs19 Acquired

20 Cold Chain

Networks as on Jun-Jul 2019 Networks as on Dec 2019

Am

bie

nt

Source: Company data, I-Sec research

Technology: Zydus has also completed the integration of digital infrastructure –

migrating all applications to Zydus Wellness systems. The company also implemented

SAP S4/HANA installation in 132 days, one of the fastest implementations in the

industry. Distributor management systems, vendor management and reverse auction

platforms have also been synced with the new systems – laying the groundwork to

become a much larger organisation, in our view.

Synergy benefits

We believe that the company has completed the groundwork for setting up the

combined entity towards accelerated growth trajectory. We believe that the acquisition

is value accretive for Zydus driven by:

Significant scale advantages in both distribution network and media buying: At

the time of acquisition, Zydus’ core business had revenue of Rs5bn while Heinz India

business (acquired) had revenue of Rs11bn. We believe that this acquisition of a

business double the size of the core, provides Zydus with significant economies of

scale. These benefits include better bargaining power with the distribution network as

well as more savings in media buying.

Cross leveraging the distribution strength: Zydus, given its healthcare/pharma

background (promoter company, Cadila Healthcare, is a Rs386bn market cap

healthcare company), has a strong chemist connect. We believe that this is likely to

help the company accelerate the growth for the acquired brands like Complan and

Glucon-D. The company has already started working towards leveraging this, by the

launch of Complan Nutrigro. This product is focused on the pharmacy and doctor

recommendation channel and is aimed to help Complan (the core brand) regain its lost

medical connect, in our opinion.

Accelerate new product launches: Greater scale, larger distribution network and an

enhanced budget for ad-spends, in our opinion, will allow Zydus to accelerate its new

product launches. We note that the company has already stepped up its new product

launches in 2020 so far (discussed in detail later).


5

Health and wellness focus by consumers to accelerate growth for 70%+ portfolio

The current pandemic, in our view, will result in a significant acceleration in the

adoption of health and wellness products given the greater awareness and willingness

of consumers. We note >70% of Zydus’ portfolio stands to benefit from this trend.

Chart 2: Brand-wise revenue contribution (FY20)

Sugar Free19.9%

Everyuth10.8%

Nutralite2.5%

Glucon D27.2%

Complan21.8%

Nycil14.4%

Sampriti Ghee3.4%


Sugar Free growth to be supported by innovation and higher health

consciousness among consumers

India has the second largest population of diabetics in the world (77 mn); China has

116mn diabetics. This translates into almost 17% share of world diabetic population

from India. According to International Diabetes Foundation (IDF), this number is likely

to increase to 136mn of diabetics in India, contributing ~20% to global diabetic

population by 2045. We believe with rising incidences of health-related diseases,

along with greater consumer awareness (accelerated due to the ongoing pandemic

and the risk from comorbidities), artificial sweetener category growth should accelerate

beyond the ~10% CAGR being reported over the past few years.

Having said that, the biggest challenges for Zydus, in our opinion, in terms of growing

the category have been: (1) Taste penalty in artificial sweeteners and (2) need to

recruit the consumer at the time of diagnosis of diabetes.

Taste penalty is basically the slight after-taste that a consumer of artificial sweetener is

left with. This impedes the adoption of the product by health conscious consumers

who are not diabetic. We believe the company has (somewhat) found a solution to this

in the product ‘Sugar Lite’. This product addresses the taste concern and hence, could

be a growth driver for health conscious consumers. Zydus launched a campaign

‘Sugar Badlo Health Badlo’ (change your sugar, improve your health) to drive growth

in FY20.


6

The other challenge, of recruiting the diabetic at the time of it being diagnosed,

remains a concern in our opinion. The company, even with its doctor and

pharmaceutical connect through Cadila (another promoter company), has so far been

unable to find an answer for this. Any potential solution to this could be a significant

growth driver for the Sugar Free brand.

Chart 3: Revenue and growth rates – Sugar Free

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Complan to benefit from market expansion and increasing penetration

The brand was unable to adjust to competition over the past five years with Heinz,

losing market share to 5% from 15% earlier. We believe the brand frequently changed

the proposition and lost the differentiation to other brands. This resulted in the

premium over Horlicks reducing to 20-25% now versus over 50% earlier.

Chart 4: Complan premium pricing

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Complan is the only brand at Zydus where they are not in the leading position and

hence, requires gaining share and not just market development.


7

Complan’s penetration at 12% is significantly lower than the 24% penetration for the

category. We believe the management has started addressing this issue through the

introduction of 75gm sachets (@Rs30). This is likely to drive new customer

recruitment.

The brand remains over-indexed in West Bengal and Tamil Nadu and therefore, Zydus

needs to expand the distribution in North and West.

The other key growth driver, in our view, will be from the market development activities

that will be done by HUL for Horlicks brand. We believe HUL will significantly drive

penetration through sachets and this opens up an opportunity for Complan as well.

Chart 5: Health Food Drinks industry size

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Chart 6: Revenue and growth rates – Complan

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8

Glucon-D growth to be driven by innovation

Glucose powder category has been one of the fastest growing categories for Zydus

where it has 59% market share. Glucon-D is positioned as an energy booster with

different variants covering the need for different vitamins.

We expect the brand to continue to grow in double digits, helped by introduction of

new variants (Immuno Volt), increased brand investment along with mass media

support and competitive trade offers (a key to win in the category).

Chart 7: Glucose powder industry size

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We estimate a significant impact on Glucon-D brand’s performance in FY21 as

summer season forms a significant portion of revenues.

Chart 8: Revenue and growth rates – Glucon-D

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9

Nutralite’s biggest challenge is to reduce dependence on B2B channel

Nutralite is a leading margarine brand in India – cholesterol free and a butter

substitute. The product also does not have trans fats and is fortified with Omega 3 and

Vitamin A, D & E.

Zydus has also introduced low calorie mayonnaise and choco spreads under the

brand, extending its health proposition and aiming to gain a larger share of the

breakfast table. Although currently a small contributor to Zydus (2% revenue

contribution), we expect the brand to benefit from these extensions.

A challenge, however, for Zydus, has been to reduce the dependence on the

institutional channel and thereby, lower the volatility in the business – we have seen

the brand getting impacted by disruptions in B2B segment.

Chart 9: Revenue and growth rates – Nutralite

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10

Leadership position in niche personal care categories

Although personal care categories have been under pressure in the current pandemic,

we expect the performance to improve in FY22.

Nycil to benefit from growing functional talc category

In talcs, functional talc segment has grown at a faster pace over the past few years,

while sensorial talc category has been under pressure (likely consumer upgrades to

deodorants).

Nycil is the market leader in the prickly heat powder category with 34% market share.

The brand is significantly ahead of competition and continues to grow backed by

investment in mass media. We, however, estimate significant impact on Nycil’s

performance in FY21 as summer season forms a significant portion of revenues.

FY21 also witnessed the first ever brand extension for Nycil, with the launch of

sanitisers in the pandemic.

Chart 10: Revenue and growth rates – Nycil

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Everyuth

Everyuth brand is positioned as a skin care range especially meant for face with

solutions for a healthy skin. The brand is positioned as a ‘Naturals’ play and hence,

has grown at 14% CAGR over the past two years – benefiting from the popularity of

natural brands.

The brand remains a market leader in scrubs (33% share) and peel-offs (78% share)

and is likely to continue its strong growth performance, backed by media campaigns,

consumer offers and on-ground promotions.

Chart 11: Revenue and growth rates – Everyuth

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12

New product development to improve penetration and recruit new customers

We especially like Zydus’ focus on new product development as a key growth driver

across its portfolio. The company has been on a spree of innovations over the past

two years. We list down the key launches, in our view, and the potential benefits from

them.

SugarLite – Significantly reduces the taste penalty in using a healthier sugar

substitute and hence, in our opinion, will increase adoption of the product.

Sugar Free Green – Relaunch of the product in a completely natural format (made

using stevia extract) is likely to mitigate any risk perception on the brand.

Complan Nutrigro – Launched through the pharmacy and doctor recommendation

channel, this product is aimed to help Complan regain its lost medical connect. We

believe the company’s 300 strong medical representative team will help increase the

adoption of this product.

Complan 75gm sachets – We believe this new SKU launch will help Complan

increase penetration of the brand, closer to the category penetration of 24% vs the

brand’s penetration at (only) 12%. Sachets are one sub-segment where Complan was

not participating and hence, losing share in new customer recruitments.

Nutralite Mayonnaise and Choco spread – These launches aim at increasing the

share of Nutralite brand at the breakfast table. These two products provide consumer

with healthier, less calorie replacements of spreads and hence, could see acceleration

in adoption given the currently health conscious consumer and greater in-home

consumption.

Glucon-D Immuno Volt – These energy bites are a way for Zydus to extend the

brand beyond just glucose powder category. The company is also trying to build on

consumers’ focus on immunity by introducing a product fortified with Vitamin C & D,

Zinc and Glucose.


13

Chart 12: New product development

January 2020 March 2020 June 2020 July 2020

Sugar Free Green

relaunch

New formulation

developed using a

new, better

tasting stevia

For consumerswho

seek weight

management

Nycil Hand

Sanitizers

Decision to execute

and launch the

product within a

fortnight

Complan Nutrigro

Complan enters the

toddler health food

drink segment

Marketed and

distributed leveraging

doctor's

recommendation and

prescription

Complan sachets

Targeted at

northern and

western regions

of India to

participate in

sachet market

Nutralite Choco

Spread

Initially launched

through e-

Commerce;

other channels

to follow

Glucon D

ImmunoVolt

Energy bites

that boost

immunity

October 2018

Launched

Sugarlite

100% naturalblended

sugar but with 50%

less calories than

normal sugar

March 2018

Everyuth tan removal

range

Launched Tan

Removal Scrub & Tan

Removal Face Pack

Enriched with

detoxifying chocolate

and vitamin-rich

cherries

January 2018

Nutralite Mayonnaise

Launched in three

flavors – Cheesy

garlic, Classic veg and

Achari

Rich in Vitamin A, D

and E to meet 30% of

the daily requirement

of these essential

nutrients



14

Financial performance, assumptions, estimates

Estimate 8% & 14% revenue & EBITDA CAGR over FY20-23E

Zydus has had a strong performance over FY09-20 (22% revenue CAGR in 11 years,

including M&A). We model 8% revenue CAGR over FY20-23E. We believe this growth

will be supported by (1) health and wellness focus by consumers (benefits >70%

portfolio), (2) leadership position in niche personal care categories, (3) expansion of

distribution network and (4) continuing investments behind brands.

Chart 13: We estimate 8% revenue CAGR over FY20-23E

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Source: Company, I-Sec research

EBITDA margin to expand 300bps over FY20-23E

Zydus’s EBITDA margin declined 380bps YoY in FY20 primarily due to the acquisition

of Heinz India consumer business which has a lower gross margin product portfolio.

We note that major raw materials prices (i.e. Refined Palm Oil, Palm Kernel Oil and

SMP) have been benign in FY21 so far – near-term margin improvement driver.

In the medium-term, margins are likely to benefit from cost efficiencies (back-end

efficiencies and synergies in manufacturing and supply chain) and premiumisation

within the existing brands. We estimate 300bps EBITDA margin expansion to 21.2%

by FY23E from 18.2% in FY20, resulting in 14% EBITDA CAGR over FY20-23E.


15

Chart 14: EBITDA margin to expand 300bps over FY20-23E

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Chart 15: Gross margin Chart 16: Staff costs (as a % of sales)

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Chart 17: A&SP (as a % of sales) Chart 18: Other opex (as a % of sales)

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16

Expect net profit to grow at 36% CAGR over FY20-23E

We expect net profit growth ahead of EBITDA CAGR of 14%. We estimate 36%

CAGR over FY20-23E driven by deleveraging of balance sheet. We estimate net profit

margin to improve 1050bps YoY to 21% in FY23 from 10.5% in FY20.

Chart 19: Net profit to grow at 36% CAGR over FY20-23E

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Return on capital employed

Zydus had healthy RoCE at 19% in FY18 before the acquisition of Heinz India

portfolio. However, post the acquisition, its RoCE declined to 6% in FY20. We expect

RoCE to improve to 9% by FY23 driven by better margins and higher asset turnover.

Chart 20: Healthy return ratios before acquisition

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10

20

30

40

50

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90

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09

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RoE RoCE



17

Chart 21: RoCE ex-Goodwill still remains healthy at ~30%

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FCF generation to improve

We estimate Zydus’ working capital to remain stable (-17 days) as the company

continues to expand distribution. We estimate free cash flow generation to improve to

Rs4.6bn in FY23E from Rs2.3bn in FY20, driven by improving operating margin and

higher asset turns.

Chart 22: OCF and FCF generation Chart 23: OCF/ EBITDA and FCF/EBITDA

(1,000)

-

1,000

2,000

3,000

4,000

5,000

6,000

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09

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n)

OCF FCF

(20)

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140

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(%)

OCF / EBITDA FCF / EBITDA

Source: Company data, I-Sec research Source: Company data, I-Sec research


18

Historical financial snapshot (10-year history)

Table 2: 10-year historical financial snapshot

CAGR

(Rs mn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY10-20 FY15-20

Revenue 2,681 3,364 3,368 3,880 4,036 4,307 3,967 4,306 5,126 8,428 17,668 21% 15%

Growth (%) 38 25 0 15 4 7 (8) 9 19 64 110

Gross Profit 1,819 2,162 2,148 2,638 2,797 3,055 2,760 2,980 3,517 5,445 9,881 18% 12%

Gross margin (%) 67.8 64.3 63.8 68.0 69.3 70.9 69.6 69.2 68.6 64.6 55.9

EBITDA 674 842 771 965 894 998 913 991 1,253 1,848 3,211 17% 12%

EBITDA margin (%) 25.1 25.0 22.9 24.9 22.1 23.2 23.0 23.0 24.4 21.9 18.2

PBT (before ex.) 717 900 822 1,078 1,036 1,197 1,168 1,240 1,497 1,811 1,655 9% 3%

Growth (%) 87.8 25.4 (8.6) 31.1 (3.9) 15.5 (2.4) 6.2 20.8 20.9 (8.6)

Adj PAT 477 595 677 971 965 1,090 1,033 1,090 1,339 1,796 1,859 15% 5%

Growth (%) 86.8 24.8 13.8 43.5 (0.7) 13.0 (5.2) 5.5 22.9 34.1 3.5

RoE (%) 56.2 49.1 41.2 43.8 33.1 29.8 23.1 20.9 21.5 8.8 5.4

RoCE (%) 77.2 67.8 43.5 40.3 28.2 24.4 18.6 16.9 18.6 6.2 6.0

Reported FCFF 532 (98) 509 664 856 652 863 465 612 1,455 2,346 16% 14%



19

Valuations and risks

We value Zydus on DCF basis with 11% WACC and 6% terminal growth assumptions.

We initiate coverage on the stock with a BUY rating based on our DCF-based target

price of Rs2,500, which implies a 46% potential upside. At our target price, the stock

will trade at 42x P/E multiple Mar-22E. In reverse DCF, the current stock price implies

an 11% EBITDA CAGR over FY20-30E (WACC of 11%, terminal growth 6%).

DCF assumptions

We value Zydus Wellness on DCF based on the following three stages:

Stage 1 (FY21E-FY30E): During this period, we estimate 11% revenue CAGR and

15% EBITDA CAGR

Stage 2 (FY30E-FY42E): During this period, we estimate 10% FCF CAGR

Stage 3 (FY42 onwards): We assume 6% terminal growth rate

Based on these assumptions, we arrive at our target price of Rs2,500.

Table 3: DCF calculations

(Rs mn, year ending Mar 31)

PV of FCF for forecasting period (FY21 – FY42) 84,263

PV of terminal cash flow 73,750

Enterprise Value 158,013

Net debt/ (cash) (2,801)

Equity Value 160,814

Number of shares (mn) 64

Target Price (Rs/ share) 2,500

Source: I-Sec research

Chart 24: Mean P/E and standard deviations

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(x)

ZYDUS P/E -1 Std Dev. Mean +1 Std Dev.

Source: Bloomberg, Company data, I-Sec research


20

Table 4: Assumptions

(Year ending Mar 31)

FY21E FY22E FY23E

Revenue growth (%) Sugar Free 4 10 12

Everyuth - 10 12 Nutralite (2) 15 12 Glucon D - 12 12 Complan 4 12 12 Nycil 2 12 10 Sampriti Ghee 4 8 8 Net sales 2 11 12

Revenue contribution (%)

Sugar Free 20.2 20.0 20.1 Everyuth 10.6 10.5 10.5 Nutralite 2.4 2.4 2.4 Glucon D 26.7 26.8 26.9 Complan 22.2 22.4 22.4 Nycil 14.4 14.5 14.3 Sampriti Ghee 3.5 3.4 3.3 Net sales 100.0 100.0 100.0

Cost assumptions (% of sales)

COGS 43.6 43.1 42.6 Staff cost 10.5 10.4 10.3 A&SP 12.5 13.0 12.8 Other opex 13.5 13.3 13.1

EBITDA margin (%) 20.0 20.3 21.2

Balance Sheet assumptions

Inventory (days) 60 60 59 Receivable (days) 24 24 23 Payable (days) 100 100 100

Borrowings (Rs mn) 2,691 - -

RoE (%) 6.4 7.8 9.0

RoCE (%) 6.8 7.7 8.7 RoCE (ex-Goodwill) (%) 33.6 36.9 36.6

Cash flow assumptions

OCF (Rs mn) 3,570 4,099 4,814 FCF (Rs mn) 3,390 3,900 4,593

OCF/ EBITDA (%) 99 101 102

FCF/ EBITDA (%) 94 96 97

Source: I-Sec research


21

Relative valuation

Table 5: Valuation summary

Company CMP

(Rs) TP

(Rs) Upside

(%) Rating

PE (x) EV/EBITDA (x) ADTV Market Cap

FY21E FY22E FY21E FY22E (US$ mn) (Rs bn) (US$ bn)

Staples

Bajaj Consumer 183 200 10 ADD 12 12 10 10 3.3 27 0.4 Britannia 3,625 3,300 (9) REDUCE 44 42 34 34 39.6 896 12.0 Colgate 1,354 1,500 11 HOLD 42 38 27 25 15.0 385 5.2 Dabur 486 550 13 ADD 50 46 45 41 23.1 891 11.9 Emami 367 400 9 ADD 31 26 23 21 5.2 177 2.4 GCPL 679 750 10 ADD 41 37 30 28 13.3 706 9.4 HUL 2,053 2,500 22 ADD 55 47 41 35 76.1 4,990 66.7 ITC 173 220 28 ADD 14 13 11 10 80.8 2,258 30.2 Jyothy Labs 144 160 11 ADD 23 21 16 16 1.7 55 0.7 Marico 340 420 23 ADD 38 34 27 24 13.6 479 6.4 Nestle 15,366 16,500 7 HOLD 70 57 46 39 32.1 1,555 20.8 Tata Consumer 494 600 22 ADD 58 49 31 28 30.3 504 6.7 Varun Beverages 679 750 11 HOLD 70 36 19 15 2.9 215 2.9 Zydus Wellness 1,714 2,500 46 BUY 42 29 28 25 1.2 96 1.3 Discretionary Avenue Supermarts 2,055 1,850 (10) REDUCE 111 59 68 39 22.2 1,406 18.8 Bata 1,343 1,100 (18) REDUCE 164 46 36 20 19.4 172 2.3 Jubilant Foodworks 2,316 2,400 4 ADD 107 55 35 24 28.6 310 4.1 Page Industries 19,375 22,000 14 ADD 156 48 80 31 12.8 214 2.9 Sheela Foam 1,392 1,500 8 ADD 68 26 34 16 0.8 74 1.0 Titan 1,117 1,250 12 ADD 122 49 66 31 51.3 1,055 14.1 United Spirits 509 650 28 ADD 73 35 38 23 23.4 398 5.3 Westlife Development 370 340 (8) HOLD (121) 63 83 19 1.7 64 0.9 Paints Akzo Nobel 2,087 2,500 20 BUY 45 36 30 23 0.5 95 1.3 Asian Paints 1,947 2,200 13 ADD 70 55 44 35 62.1 1,951 26.1 Berger Paints 571 540 (5) HOLD 96 78 58 49 12.2 562 7.5 Kansai Nerolac 478 460 (4) HOLD 55 42 34 27 1.9 279 3.7


EV/ sales (x) P/B (x) P/CEPS (x) RoE (%) RoCE (%) CAGR (FY20-22E) (%)

Company FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E Revenues EBITDA PAT

Staples Bajaj Consumer 2.9 2.8 3 3 12 12 27 23 29 24 4 6 7 Britannia 6.4 6.2 16 13 40 38 36 30 25 21 11 18 20 Colgate 7.8 7.2 20 19 34 31 54 57 64 67 6 11 12 Dabur 9.7 8.9 11 10 44 41 24 23 18 17 6 12 10 Emami 6.3 5.8 9 8 32 25 29 33 32 34 5 9 11 GCPL 6.9 6.4 8 7 36 33 21 21 17 17 7 10 9 HUL 10.7 9.5 11 10 49 42 34 23 28 19 15 19 22 ITC 4.2 3.7 4 3 13 12 24 26 25 29 8 7 4 Jyothy Labs 2.9 2.7 4 4 19 17 18 19 16 16 9 16 20 Marico 5.8 5.2 13 12 34 30 36 37 32 33 7 11 11 Nestle 11.0 9.5 59 45 59 49 95 90 39 40 11 16 15 Tata Consumer 4.2 3.8 2 2 44 38 5 5 6 6 10 11 17 Varun Beverages 3.6 2.9 5 5 24 18 8 14 9 14 5 2 1 Zydus Wellness 5.6 5.1 2 2 38 27 6 8 7 8 7 12 43 Discretionary

Avenue Supermarts 5.1 3.6 11 9 85 50 10 17 14 22 23 27 30 Bata 8.2 5.3 9 8 43 24 5 18 9 24 2 1 7 Jubilant Foodworks 8.0 6.2 23 17 47 32 23 36 17 27 11 19 36 Page Industries 8.9 6.2 24 20 104 41 16 46 14 36 9 14 15 Sheela Foam 3.3 2.2 7 5 39 20 10 23 9 22 17 15 13 Titan 5.6 3.5 14 12 83 40 12 26 13 29 14 13 16 United Spirits 5.1 4.0 9 7 48 28 12 22 13 23 1 5 16 Westlife Development 5.8 3.3 11 9 66 25 (9) 16 (9) 23 6 17 204 Paints

Akzo Nobel 4.0 3.3 7 6 33 27 16 18 16 18 1 1 5 Asian Paints 9.1 7.4 16 14 53 43 25 28 22 25 12 12 12 Berger Paints 9.8 8.2 19 16 72 60 20 22 17 19 4 4 4 Kansai Nerolac 5.5 4.4 6 6 41 33 12 14 11 14 5 10 9

Source: Bloomberg, I-Sec research


22

Risks

Delays in launch / failure of new products: Any delay in launch of new products

and/or failure of new products may impact Zydus’ financials.

Inability to expand distribution: If the company’s geographical/ distribution

expansion plans fail, or get delayed, earnings growth may be impacted.

Steep rise in competitive pressures and input prices: Steep rise in competitive

pressures, significant increase in raw materials in a short timeframe can hurt Zydus’

earnings.


23

Company description

Chart 25: Company timeline

1988 1991 2005 2006 2009 2011 2017 2018 2019

Launched

Sugar Free with

Aspartame1

Launched

Everyuth

Skincare range1

Launched

Sugar Free

Natura with

Sucralose1

Acquisition of

Carnation Nutra

(CANFL)1

Sugar Free and

Everyuth carved

out from Cadila

Healthcare to

form Zydus

Wellness; listed

on NSE

New production

facility at Sikkim

– Unit I

Launched Sugar

Free Green with

Stevia & new

production

facility at Sikkim

Unit II

Launched Everyuth Tan

Removal range, Nutralite

Mayonnaise & Sugarlite

Acquisition of Heinz India

Private Limited (“Heinz”)

and integration & merger

with Zydus Wellness

Products


Category and brand size

Chart 26: Brand-wise revenue contribution (FY20)

Sugar Free19.9%

Everyuth10.8%

Nutralite2.5%

Glucon D27.2%

Complan21.8%

Nycil14.4%

Sampriti Ghee3.4%


Table 6: Category size, growth rates and market shares

Category size (Rs mn) FY17-20 CAGR (%) Market share (%)

Glucon-D 9,800 11 59

Sugar Free 3,850 9 94

Complan 73,000 6 5

Everyuth 29,530 10 6

Nycil 7,610 10 34



24

Management team

Table 7: Board of Directors

Name Designation Description

Dr. Sharvil P Patel Chairman & Non-Executive Director

Director since 2009; MD of Cadila Healthcare (parent company)

Bachelor’s degree in chemical and pharmaceutical science, doctorate in philosophy and PhD

Tarun Arora CEO & Whole-time director

Director since 2015

Bachelor’s degree in science and post graduate diploma in business management

Previously associated with Danone, Narang Beverages as General Manager

Ganesh Nayak Non-executive director

Director since 2006

Working with Cadila Healthcare since 1977; COO and Executive Director currently

Completed the ‘General Manager Program’ from Harvard Business School, USA

Ashish Bhargava Nominee Director

Represents True North (Partner)

Prior to joining True North, he was part of Marico Limited

Bachelors degree in Engineering and master’s degree in management

Savyasachi S. Sengupta

Independent Director Director since 2018

Previously associated with Alembic Pharmaceuticals, Cadila Healthcare and Sarabhai Piramal Limited

Kulin S Lalbhai Independent director

Director since 2016

Executive Director of Arvind Limited; has also worked with McKinsey & Co

Bachelor’s degree in Science and master’s degree in business administration

Dharmishta N. Raval

Independent Director

Director since 2019

Lawyer, graduate and master in Legislative Laws

Had worked as Executive Director in SEBI till 2003 and then started practice as an Advocate at Gujarat High Court

Srivishnu Raju Nandyala

Independent Director

Director since 2019

Director of Exciga Land Holdings, Excigia Properties, Amara Raja Batteries and Heritage Foods

Bachelor’s degree in engineering and MBA



25

Shareholding pattern

Chart 27: Shareholding pattern

Cadila Healthcare Ltd.

63.55%

Zydus Family Trust4.29%

Threpsi Care12.52%

LIC3.20%

Others16.44%



26

Financials

Table 8: Profit and loss statement


FY18 FY19 FY20 FY21E FY22E FY23E

Net Revenue 5,126 8,428 17,668 18,039 20,058 22,356

Less:

Cost of goods sold 1,609 2,984 7,788 7,861 8,640 9,519 Employee cost 566 856 1,747 1,894 2,086 2,303 Other expenses 1,698 2,741 4,923 4,684 5,269 5,795

Total operating expenses 3,874 6,580 14,458 14,439 15,995 17,617

EBITDA 1,253 1,848 3,211 3,600 4,063 4,740

Less: D&A 89 125 264 269 270 271

EBIT 1,164 1,723 2,947 3,331 3,793 4,469

Less: Gross Interest 17 301 1,399 805 120 - Add: Other Income 351 389 107 110 132 232

Recurring PBT 1,497 1,811 1,655 2,637 3,806 4,700

Less: Taxes 132 (6) (205) - - - Less: Minority Interest (26) (21) - - - -

Net Income (Reported) 1,339 1,691 1,417 2,637 3,806 4,700

Extraordinary items - (105) (442) - - -

Recurring Net Income 1,339 1,796 1,859 2,637 3,806 4,700



27

Table 9: Balance sheet



ASSETS

Current Assets, Loans & Advances

Inventories 351 2,331 2,923 2,965 3,270 3,614 Sundry debtors 88 960 1,182 1,186 1,291 1,409 Cash and bank balances 4,137 1,643 824 1,376 1,697 5,363 Other current assets 437 2,316 1,946 1,983 2,188 2,420 Loans and advances 20 67 98 100 111 124 Total Current Assets 5,032 7,317 6,973 7,610 8,556 12,929

Current Liabilities & Provisions

Current Liabilities 787 3,923 4,911 4,942 5,468 6,094 Provisions and other liabilities 206 1,107 1,189 1,213 1,349 1,504 Total Current Liabilities & Provisions 993 5,030 6,100 6,155 6,817 7,598

Net Current Assets 4,039 2,287 874 1,455 1,739 5,331

Investments 1,476 461 1,104 1,104 1,104 1,104

Fixed assets Gross block 1,316 8,920 9,068 9,248 9,448 9,669

Less: Accumulated depreciation 505 1,443 1,692 1,960 2,230 2,501 Net Block 811 7,477 7,376 7,288 7,218 7,168 CWIP 2 103 35 35 35 35

Goodwill 228 38,197 39,200 39,200 39,200 39,200

Total Assets 6,556 48,525 48,589 49,082 49,296 52,839

LIABILITIES AND SHAREHOLDERS' EQUITY Shareholders' fund Equity share capital 391 577 577 643 643 643

Reserves and surplus 6,521 33,286 34,030 46,956 49,861 53,403 Total Shareholders Fund 6,912 33,863 34,607 47,599 50,504 54,047

Borrowings 250 15,693 15,191 2,691 - - Deferred Tax Liability (738) (1,030) (1,208) (1,208) (1,208) (1,208) Minority Interest 132 - - - - -

Total Liabilities and shareholders' equity 6,556 48,525 48,589 49,082 49,296 52,839



28

Table 10: Cashflow statement



Cash flow from operating activities

PBT 1,497 1,706 1,213 2,637 3,806 4,700

Add: Depreciation 89 125 264 269 270 271

Add: Other Operating activities (298) (202) 1,292 694 (12) (232)

CFO before change in NWC 1,288 1,630 2,769 3,600 4,063 4,740

(Inc)/dec in debtors (48) (70) (190) (4) (105) (117)

(Inc)/dec in inventories (32) 2 (593) (42) (304) (344)

(Inc)/dec in other current assets (462) (388) (349) (40) (215) (245)

Inc/(dec) in current liabilities/provisions 62 1,081 972 56 662 781

Change in NWC (481) 626 (160) (30) 36 75

Less: Taxes Paid 117 630 16 - - -

Net Cash flow from Operating Activities 691 1,625 2,593 3,570 4,099 4,814

Capital Commitments (79) (171) (246) (180) (200) (221)

Free Cashflow 612 1,455 2,346 3,390 3,900 4,593

Cashflow from Investing Activities Purchase of Investments (819) (41,650) (641) - - -

Other non-operating income 307 204 55 110 132 232

Net Cashflow from Investing Activities (591) (41,617) (832) (70) (68) 10

Cashflow from Financing Activities

Increase in reserves - 25,618 - 10,999 - -

Inc (Dec) in Borrowings - 15,142 (1,903) (13,305) (2,810) -

Dividend paid including tax and others (18) (376) (694) (643) (901) (1,158)

Net Cashflow from Financing Activities (e) (18) 40,384 (2,597) (2,949) (3,711) (1,158)

Total Increase / (Decrease) in Cash 81 393 (837) 551 321 3,667

Opening Cash and Bank balance 3,413 3,494 3,887 3,050 3,601 3,922

Closing Cash and Bank balance 3,494 3,887 3,050 3,601 3,922 7,589

Increase / (Decrease) in Cash and Bank balance

81 393 (837) 551 321 3,667



29

Table 11: Key ratios



Per Share Data (Rs)

EPS 34.3 31.1 32.2 41.0 59.2 73.1 Cash EPS 36.5 31.5 29.2 45.2 63.4 77.3 Dividend per share (DPS) 8.0 5.0 5.0 10.0 14.0 18.0 Book Value per share (BV) 176.9 587.3 600.2 740.0 785.1 840.2

Growth (%)

Net Sales 19.1 64.4 109.6 2.1 11.2 11.5 EBITDA 26.4 47.5 73.7 12.1 12.9 16.7 PAT 22.9 26.3 (16.2) 86.1 44.3 23.5 DPS 23.1 (37.5) - 100.0 40.0 28.6

Valuation Ratios (x)

P/E 50.0 55.0 53.2 41.8 29.0 23.5 P/CEPS 46.9 54.4 58.8 38.0 27.1 22.2 P/BV 9.7 2.9 2.9 2.3 2.2 2.0 EV / EBITDA 49.2 49.2 28.3 28.2 25.0 21.4 EV / Sales 12.0 10.8 5.1 5.6 5.1 4.5

Operating Ratios

Raw Material / Sales (%) 31.4 35.4 44.1 43.6 43.1 42.6 Employee cost / Sales (%) 11.0 10.2 9.9 10.5 10.4 10.3 Other exps / Sales (%) 33.1 32.5 27.9 26.0 26.3 25.9 Other Income / PBT (%) 23.4 21.5 6.5 4.2 3.5 4.9 Effective Tax Rate (%) 8.8 (0.3) (12.4) - - - Working Capital (days) (7.0) 27.9 (2.3) (1.6) (2.1) (3.1) Inventory Turnover (days) 25.0 100.9 60.4 60.0 59.5 59.0 Receivables (days) 6.2 41.6 24.4 24.0 23.5 23.0 Payables (days) 56.0 169.9 101.5 100.0 99.5 99.5 Net D/E (x) (0.8) 0.4 0.4 0.0 (0.1) (0.1)

Profitability Ratios (%)

Net Income Margins 26.1 20.1 8.0 14.6 19.0 21.0 RoACE 18.6 6.2 6.0 6.8 7.7 8.7 RoAE 21.5 8.8 5.4 6.4 7.8 9.0 Dividend Payout 28.1 20.6 24.5 24.4 23.7 24.6 Dividend Yield 0.5 0.3 0.3 0.6 0.8 1.1 EBITDA Margins 24.4 21.9 18.2 20.0 20.3 21.2



30

Price charts

Akzo Nobel Asian Paints Avenue Supermarts Bajaj Consumer Bata India

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9

Mar-

20

Se

p-2

0

(Rs)

200

700

1,200

1,700

2,200

2,700

Se

p-1

7

Ma

r-18

Se

p-1

8

Mar-

19

Se

p-1

9

Ma

r-20

Se

p-2

0

(Rs)

50

100

150

200

250

300

Se

p-1

7

Ma

r-18

Se

p-1

8

Ma

r-19

Se

p-1

9

Ma

r-20

Se

p-2

0

(Rs)

Kansai Nerolac Marico Nestle Page Industries Sheela Foam

250

300

350

400

450

500

550

600

Se

p-1

7

Mar-

18

Se

p-1

8

Ma

r-19

Se

p-1

9

Ma

r-20

Se

p-2

0

(Rs)

200

250

300

350

400

450

Se

p-1

7

Mar-

18

Se

p-1

8

Mar-

19

Se

p-1

9

Mar-

20

Se

p-2

0

(Rs)

4,0006,0008,000

10,00012,00014,00016,00018,00020,000

Se

p-1

7

Mar-

18

Se

p-1

8

Mar-

19

Se

p-1

9

Mar-

20

Se

p-2

0

(Rs)

2,000

12,000

22,000

32,000

42,000

Se

p-1

7

Mar-

18

Se

p-1

8

Mar-

19

Se

p-1

9

Mar-

20

Se

p-2

0

(Rs)

650

850

1,050

1,250

1,450

1,650

1,850

2,050

Se

p-1

7

Mar-

18

Se

p-1

8

Mar-

19

Se

p-1

9

Mar-

20

Se

p-2

0

(Rs)

Tata Consumer Titan United Spirits Varun Beverages Westlife Development

100

200

300

400

500

600

700

Se

p-1

7

Ma

r-18

Se

p-1

8

Ma

r-19

Se

p-1

9

Ma

r-20

Se

p-2

0

(Rs)

350

550

750

950

1,150

1,350

1,550

Se

p-1

7

Mar-

18

Se

p-1

8

Mar-

19

Se

p-1

9

Mar-

20

Se

p-2

0

(Rs)

200

400

600

800

1,000

Se

p-1

7

Ma

r-18

Se

p-1

8

Mar-

19

Se

p-1

9

Ma

r-20

Se

p-2

0

(Rs)

0

200

400

600

800

1,000

Se

p-1

7

Mar-

18

Se

p-1

8

Ma

r-19

Se

p-1

9

Ma

r-20

Se

p-2

0

(Rs)

100

200

300

400

500

600

Se

p-1

7

Ma

r-18

Se

p-1

8

Mar-

19

Se

p-1

9

Ma

r-20

Se

p-2

0

(Rs)

Source: Bloomberg


31

Index of tables and charts

Tables

Table 1: Source of funds for acquisition of Heinz India’s consumer business ..................... 3 Table 2: 10-year historical financial snapshot ..................................................................... 18 Table 3: DCF calculations ................................................................................................... 19 Table 4: Assumptions ......................................................................................................... 20 Table 5: Valuation summary ............................................................................................... 21 Table 6: Category size, growth rates and market shares ................................................... 23 Table 7: Board of Directors ................................................................................................. 24 Table 8: Profit and loss statement ...................................................................................... 26 Table 9: Balance sheet ....................................................................................................... 27 Table 10: Cashflow statement ............................................................................................ 28 Table 11: Key ratios ............................................................................................................ 29

Charts

Chart 1: Supply chain integration .......................................................................................... 4 Chart 2: Brand-wise revenue contribution (FY20) ................................................................ 5 Chart 3: Revenue and growth rates – Sugar Free ................................................................ 6 Chart 4: Complan premium pricing ....................................................................................... 6 Chart 5: Health Food Drinks industry size ............................................................................ 7 Chart 6: Revenue and growth rates – Complan ................................................................... 7 Chart 7: Glucose powder industry size ................................................................................. 8 Chart 8: Revenue and growth rates – Glucon-D ................................................................... 8 Chart 9: Revenue and growth rates – Nutralite .................................................................... 9 Chart 10: Revenue and growth rates – Nycil ...................................................................... 10 Chart 11: Revenue and growth rates – Everyuth................................................................ 11 Chart 12: New product development .................................................................................. 13 Chart 13: We estimate 8% revenue CAGR over FY20-23E ............................................... 14 Chart 14: EBITDA margin to expand 300bps over FY20-23E ............................................ 15 Chart 15: Gross margin ....................................................................................................... 15 Chart 16: Staff costs (as a % of sales) ............................................................................... 15 Chart 17: A&SP (as a % of sales) ....................................................................................... 15 Chart 18: Other opex (as a % of sales) .............................................................................. 15 Chart 19: Net profit to grow at 36% CAGR over FY20-23E ................................................ 16 Chart 20: Healthy return ratios before acquisition .............................................................. 16 Chart 21: RoCE ex-Goodwill still remains healthy at ~30% ................................................ 17 Chart 22: OCF and FCF generation ................................................................................... 17 Chart 23: OCF/ EBITDA and FCF/EBITDA ........................................................................ 17 Chart 24: Mean P/E and standard deviations ..................................................................... 19 Chart 25: Company timeline ............................................................................................... 23 Chart 26: Brand-wise revenue contribution (FY20) ............................................................ 23 Chart 27: Shareholding pattern ........................................................................................... 25


32

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