Zydus Wellness-Solace In Turbulent Times

With rapidly growing urban population resulting in rising demand for health food and beverages, Zydus Wellness (ZWL), earlier known as Carnation Nutra – Analogue Foods, which is a market leader in low calorie food market, is expected to be a beneficiary.    

The scrip also seems to be placed well on the valuation front even after the increased equity base. Equity has increased to 3.91 crore shares from just 0.56 crore after the recent scheme of arrangement, where the consumer health division of Cadila Healthcare was transferred to ZWL and 4 equity shares (FV Rs 10 each) of ZWL were allotted for every 15 shares (FV Rs 5 ) held in Cadila Healthcare. Considering this, CMP of Rs 70 discounts its FY09E earnings by 13x, which is much lower as compared to other FMCG companies which are trading at more than 20x. 

It is a debt free company which provides solace in the current difficult macro economic situation. Again, management like Cadila Healthcare provides confidence. Further increase in management stake in the last three quarters seems to be a positive factor. Besides, in January 2009, Pioneer Asset Management acquired 3 lakh shares at Rs 75 per share. We, therefore, recommend to the investors to buy the scrip at current level with a target price of Rs 95 in next one year. 

ZWL is a pioneer, offering healthier dietary options to the consumers with a product range comprising Sugar Free Gold (India’s No.1 sweetener with a share of 70 per cent in the Rs 70 crore market), Sugar Free Natura (a zero calorie sucralose based sugar substitute), Sugar Free D’lite (A low calorie healthy drink) and Nutralite (A premium cholesterol-free table spread). It also caters to the skincare segment with its EverYuth and Dermacare brands. In FY08, its Sugar Free brand reported sales of Rs 60 crore, EverYuth Rs 35 crore and Nutralite Rs 56.33 crore. 

While the low calorie market is expected to grow at 20 per cent, Sugar Free and Nutralite have maintained over 25 per cent growth rate in the 9MFY09. We expect the company to maintain growth rate at par with the industry. Even the EverYuth Brand has performed well and is expected to maintain 12-13 per cent growth rate (at par with the industry). 

We feel the scheme of arrangement is a strategic one and will prove beneficial for ZWL. It will benefit in terms of size as well as scale of operations, beside synergy benefits in marketing and distribution channel. The management has stated “it made strategic business sense to create synergies for similar businesses as we would be better placed to unlock value through a concerted effort under a single banner”. 

On the financial front, ZWL has posted consistent increase in top-line as well as bottom-line for the last six years. For 9MFY09, it has posted a top-line of Rs 150.25 crore and bottom-line of Rs 16.85 crore. The 9MFY09 figures are not comparable with 9MFY08 as restructuring has been done recently. Going ahead, we expect margins to improve on account of synergy and reduction in prices of raw material like vegetable oil. For FY09, we expect the company to post a top-line of Rs 181 crore and bottom-line of Rs 21.70 crore. Considering all these factors, we recommend the investors to buy the scrip at current level.