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Zydus Wellness - Leadership in niche categories; initiate at BUY - ICICI Securities

Posted On: 2020-09-24 08:31:24

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.

Shares of ZYDUS WELLNESS LTD. was last trading in BSE at Rs.1804 as compared to the previous close of Rs. 1718.6. The total number of shares traded during the day was 9987 in over 2317 trades.

The stock hit an intraday high of Rs. 1853 and intraday low of 1701. The net turnover during the day was Rs. 17746262.

Source: Equity Bulls

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