>ZYDUS WELLNESS LIMITED

■  Strong presence in niche segment: The Company has created niche segment by introducing Sugar free sweetener for diabetes, Nutralite butter for health conscious, EverYuth skin care and also created one more brand named Actilife which is an adult’s drink. The company being a niche player enjoys commendable market share and presence in the respective category. We expect gross revenue register a growth of 17% and 20% in FY13E and FY14E respectively.


■  Launch of value added products to widen consumer offering: Zydus Wellness has launched extensions, variants, SKUs’ under the already existing brands so as to fill the product gap, to enhance the wider offering; thus, expanding the present loyal customer base to other product categories. We believe that the company enjoys the premium position in the niche segment and enjoys the first mover advantage in all the categories. We also believe rising health awareness and the growing number of people with diseases such as diabetes and blood pressure will result in wider acceptance of such products thus; boosting revenues.


■  Expansion in distribution network to boost revenue: The success in the consumer business is broadly dependent on the strong distribution network. The company understands the necessity of strong distribution network and on the same context is planning to increase its current 0.5mn outlets to 1.5mn. The company is expected to use the distribution network of its parent company (Cadila) to utilize the prescription route to promote its products. We believe this will boost the revenues going forward.


■  Increase in Advertisement expenditure to improve volume growth: Zydus has cut back its advertisement expenditure in FY12 as the rival companies like HUL, J&J, etc had increased their advertisement expenses. This had led Zydus to cut back their advertisement expenses which resulted into the subdued performance in EverYuth. Management expects to revive the falling volumes and register double digit growth as company resumes its brand campaign n Q1FY13.


■  Debt free company: Zydus is a zero debt company and has cash reserve of Rs. 132 crores on its books. The company is also open for inorganic growth and is scouting for some viable options. We feel that with the zero debt and sufficient cash on its books, the company can leverage the situation without stretching its balance sheet.


■  Lower Effective Tax rate and Excise Duty: The company earlier used to go for third party manufacturing. But recently the company has set-up a facility in Sikkim in Q2FY12. As the company is expected to pay excise duty in Sikkim, but collect the refund from the government in the next year, the excise duty is likely to drop in the 2HFY13E.


■  Valuation & Recommendation
We initiate coverage on Zydus Wellness with a “BUY” rating with a price target of Rs. 477 per share (25x FY13E), an upside of 28.6%.

RISH TRADER