Zydus Wellness – Quarterly Results Update

Zydus Wellness Ltd. reported a degrowth of 1.5% QoQ / up 0.9% YoY in revenue to Rs.699.2 crores owing to unseasonal rains affecting the company’s Glucon D portfolio, restricting the company to beat market consensus of Rs. 754.2 crores. The company’s GP margins declined 165 bps YoY as a result of an unfavourable product mix, while EBITDA margins declined 243 bps QoQ / 458 bps YoY to 16.6% in Q1FY24. 

The PAT fell to Rs. 110.4 crores in Q1FY24 compared to 137.0 crores in Q1FY23, missing market expectations of Rs. 137 crores whereas the PAT margin came in at 15.8% in the quarter compared to 19.8% in the corresponding quarter of last year. The decline in PAT can also be attributed to a one-time expenditure of Rs.14.2 crores due to a one time settlement with workers, legal charges, and provision for inventory write-off for the Sitarganj plant.

Key Concall Highlights

• Revenue grew 0.9% YoY to Rs. 699 crores with volume growth of 4.5% (excluding Glucon-D) while total volume declined 6.2% (including Glucon-D) in Q1FY24. The company added that it plans to take appropriate price hikes in the upcoming quarters to address milk inflation.
• The company’s Glucon D segment sales were impacted due to unseasonal rains in the quarter. Overall, the glucose powder category witnessed a DE growth of 3% on the MAT level while GlucoseD market share fell by 57 bps to 59.9% but maintained its market leadership in the industry.
• Other expenses grew 13.6% YoY due to the high cost of alternative fuel and the increase in statutory wages. Additionally, the business incurred a one-time expenditure of Rs. 14.2 crores on account of a one-time settlement with workers, legal charges, and provision for inventory write-off.
• Complan’s market share stood at 4.5% in the health foods drink category, with 12% growth in terms of the number of household usage at the MAT level. To recover its EBITDA margins, the company is planning to take price hikes in the upcoming quarters.
• In the next 2-3 years, the company aims to get its EBITDA margins back in the 17-18% range with the help of pricing actions, better product mix, and assuming stable commodity prices.
• Nycil’s market share increased by 117 basis points over the same period last year, which now stood at 35.5% in the Prickly heat powder category. Despite unseasonal rains and erratic weather conditions, this category registered growth in comparison with Glucon-D.
• Sugar-Free has maintained its market leadership at 96.2% level. In the quarter gone by, the portfolio registered a single-digit growth as compared to the double-digit growth momentum reported.
• Strengthening its international presence, the company’s Bangladesh subsidiary became operational in Q1FY24 via Zydus Wellness BD Pvt. Ltd.
• The company aims to expand its direct reach to 7 lakh stores in FY24 as compared to 6 lakh stores and take its overall product availability from 2.5 million stores to 3 million stores.

Valuation and Outlook

Zydus Wellness Ltd. recorded a subdued 0.9% YoY growth in its topline, owing to negative volume growth in Glucon-D due to unseasonal rains affecting the company’s seasonality play in the fourth quarter. Although the company maintained its leadership position in five of its categories; Glucose Powder, Complan, and Everyuth Facial Cleansing witnessed a drop in its market share. On a sequential basis, GP margins improved on account of softening commodity prices while EBITDA margins deteriorated on both sequential and annual basis due to an unfavourable product mix and an increase in wage rates. 

Moving forward, our focus would be on the company’s commentary on its Sweeteners portfolio with increasing concerns over the usage of aspartame, Complan brand performance, and volume trajectory of the Glucon-D business in summer (higher focus in Q4FY24 and Q1FY25 of next year). We would also track the margin profile of the business with the company planning to take appropriate price hikes in the upcoming quarters, with aim to get its margins back in the 17-18% range.