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Zydus Wellness: Price-hike boosts margin - Views on News from Equitymaster
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Zydus Wellness: Price-hike boosts margin
Sep 28, 2012

Zydus Wellness Limited has announced its first quarter financial results of 2012-2013 (1QFY13). The company has reported 4% YoY increase in sales and 59% YoY rise in net profits. Here is our analysis of the results.

Performance summary
  • Zydus Wellness posted a 4% rise in revenues in 1QFY13 led by price-hikes.
  • The company's operating margin expanded by 230 basis points led by lower raw material costs and other expenses (both as a proportion of sales).
  • Earnings surged by 59% aided by steep rise in other income and lower tax outgo.

Consolidated Financial snapshot
(Rs m) 1QFY12 1QFY13 % change
Total income 910 946 4.0%
Expenditure 782 791 1.2%
Operating profit (EBITDA) 128 155 20.8%
EBITDA margin (%) 14.1% 16.4%  
Other income 20 35 70.1%
Interest 0 0 0.0%
Depreciation 7 11 45.8%
Profit before tax 141 179 26.6%
Exceptional items - -  
Tax 57 41 -27.8%
Profit after tax/(loss) 84 138 63.4%
Minority loss (1) 2  
Net profit 85 135 59.4%
Net profit margin (%) 9.3% 14.3%  
No. of shares (m)   39  
Diluted earnings per share (Rs)*   18.6  
Price to earnings ratio (x)*   22.2  
* On a 12-month trailing basis

What has driven growth in 1QFY13?
  • Zydus Wellness reported a 4% rise in topline in 1QFY13 backed by price-hike in its Everyuth product category and increased offtake of Sugar Free on higher promotions.

    Consolidated Financial snapshot
    As a % of net sales 1QFY12 1QFY13 Change in basis points
    Total cost of goods 35.8% 29.0% -679.6
    Employee costs 5.5% 6.8% 129.3
    Advertisement costs 29.1% 33.2% 410.4
    Other expenditure 15.5% 14.7% -87.7

  • Zydus improved its operating performance significantly during the quarter. The company's operating margin expanded by 230 basis points largely on account of price-hike taken in the EverYuth category in the March 2012 quarter. As a result the cost of goods to sales ratio decreased by 680 basis points. However its impact was partially offset by 411 basis points jump in ad-spends as a proportion of sales.

  • Income tax benefits after the commissioning of the Sikkim facility led to a fall in tax incidence to 23% from 40% in the year-ago quarter. This coupled with a 70% jump in other income led to a 59% surge in the company's net profit for the quarter.

What to expect?
After growing in double-digits in the past two years, the company's sales were hit in FY12 due to steep decline in sales of EverYuth and slowdown in Sugar Free sales. Escalation in cost overheads after the commissioning of the Sikkim facility in FY12 led the company to cut down advertisement & promotional (A&P) spends. But higher media spends by MNC's in the face wash category pulled down EverYuth revenues. Similarly with Sugar Free mainly being targeted at the diet-conscious population, lower marketing led to slower sales. However, the company got its act together and stepped up A&P spends in 4QFY12. As a result the company has been able to arrest decline and post modest rise in turnover in 1QFY13. Even price-hikes taken have led to higher profitability during the quarter.

We had given a BUY recommendation on this stock. The stock has already fetched 22% returns since our recommendation. On account of its leadership position in the emerging low calorie sweetener segment coupled with strong reserves and zero debt, we would advice investors to HOLD the stock.

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