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Zydus Wellness: Research meet extracts

Nov 24, 2009

We recently met up with the management of Zydus Wellness during our trip to Ahmedabad. The purpose of the research meeting was to understand the company’s business and the sector and its future prospects. Here are the key extracts of our meeting.

Company background: Formerly known as Carnation Nutra-Analogue Foods Limited, Zydus Wellness Limited (ZWL) is involved in the business of manufacturing and selling various consumer products. It has three brands in its product portfolio. They are as follows:

  • Sugar Free, which is an artificial sweetener and is considered as a healthy alternative to sugar,
  • EverYuth, which is a skin care product range ranging from face wash, facial masks (peel off, packs), scrubs, sun blocks, winter care - (body lotion and cream), cleanser and toner, men skin care - (face washes, sun block, moisturizer, & scrub)
  • Nutralite – A table margarine which is considered as a healthier alternative to butter.

The company currently has one manufacturing facility for Nutralite. The other two products i.e., EverYuth and Sugar Free are outsourced.

Industry size and market share: Considering that ZWL is the first mover in the artificial sweetener and the margarine spaces, one can say that its products majorly make up the market. It is believed that Sugar Free has a share of over 80% in the sugar substitutes market. In this segment, the company faces competition from a brand named Equal, which garners a market share of only 9%. This puts ZWL in a very strong position in terms of market share. As per AC Nielsen, the low calorie sweetener segment is growing at a pace of about 23% on an annual basis. Under the Sugar Free brand, the company also sells a low calorie beverage named Sugar Free D’lite. This segment of the company has grown at an average annual rate of 25% over the past three years.

Nutralite on the other hand has a market share of about 75%. However, if one takes into the butter market into consideration, then the figure would be around the region of 10%. This segment of the company has grown at a pace of about 26% over the past three years. The sales mix of this product is 30% retail and the balance is through institutions like hotels, restaurants and airlines.

In the skin care segment, ZWL is believed to be the market leader for products such as scrubs (69% market share) and peel-offs (96-97% market share). Further, it is also believed to be second largest in the face-wash category with a share of about 11%. As per AC Nielsen, the peel-off market is growing at a strong pace of 85% and above. The scrub market is believed to be growing at a pace of 35%. Over the past three years, this segment of the company has grown at an average annual rate of 25%.

Sugar Free is the largest revenue contributor with a share of about 40%. It is followed by Nutralite contributing nearly 34%. The balance is added by ZWL’s EverYuth products.

Pricing strategy: Despite of having the first mover advantage (across various products) and a huge chunk of the market share, ZWL has decided to keep the prices of its products quite low. This is a strategy that the company has taken. This in turn also becomes an entry barrier for competitors.

Capex: ZWL is currently planning to build a new manufacturing facility with a capex of about Rs 300 m. This unit will manufacture products under the Sugar Free and EverYuth brands.

Key risks: Being a company involved in the business of consumer goods, ZWL definitely faces competition. Just to give an example, Wipro has become a peer group for ZWL. The IT to consumer major recently launched its own artificial sweetener under the brand name Sweet 'N' Healthy.

Another risk that ZWL faces is that the share of modern retail to the overall revenues stands at only 6% to 8%. Going forward, the company expects this to rise. As such, as and when the same happens, the prices of products are likely to decrease. In addition it would also face issues related to higher working capital requirements. This is because of lower payments from such clientele that will lead to an overall increase in debtor days.

What to expect?

At the current price of Rs 217, the stock is trading at a multiple of 22.6 times its trailing twelve month earnings. Despite considering that ZWL has been growing at a strong pace and has also reported strong quarterly numbers in the recent past, these valuations are slightly beyond our comfort zone.

The company has set out a target of achieving revenues of Rs 5 bn by FY14. Considering that during FY09, it reported a topline of Rs 1.9 bn, this translates as a compounded growth of 18% on an annual basis. Taking into account the prospects and the good brand power ZWL’s products enjoy, we believe this target may not be completely out of reach. However, it will have to keep a close watch on margins on the back of increasing competition and the volatile input costs.

The company also plans to introduce different variants (of existing products) and new products going forward. While it has not divulged much information on the same as of now, the news for the same are supposedly to be announced soon.

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