Zydus Wellness - Strong quarter: Earnings growth momentum to continue - Nirmal Bang

Zydus posted a strong quarter in terms of Net Sales/EBITDA/PAT growing 28.2%/22.3%/59.7% respectively. The EBITDA margin contracted by 140bps YoY to 29.3% and expanded by 160bps QoQ. The PAT registered a growth of 59.7% YoY to Rs. 37.4 crore and by 65.7% QoQ.

- Net Sales for Q4FY13 increased by 28.2% YoY to Rs. 102.9 crore and by 7.5% QoQ. The strong growth in the Net Sales was attributed to the high double digit growth (+50% volume growth & 35% of the price hike impact though on a lower base) in Sugarfree and high double digit growth in EverYuth though on a lower base. However, Nutralite continues to disappoint with growth in single digit.

- The EBITDA was up by 22.3% YoY to Rs. 30.1 crore and by 13.7% QoQ. The EBITDA margin was down by 140bps YoY to 29.3% in Q4FY13 and up by 160 bps QoQ. The margin was down on YoY basis due to the jump in employee expenses and Other expenses as a % of sales. The advertisement expenditure was 9.6% as a % of sales in Q4FY13 as against 10.3% in Q4FY12 and 15.3% in Q3FY13. Gross margin stood at 67.3% in Q4FY13 as against 65.4% in Q4FY12 and 66.3% in Q3FY13.

- The Adj. PAT was up by 59.7% YoY to Rs. 37.4 crore and by 65.7% QoQ. The PAT margin was up by 710bps YoY to 36.3% in Q4FY13 and by 1270 bps QoQ. The significant jump in profitability of the company is attributed to the tax write-back of Rs. 5.1 crore in Q4FY13 as against 9.9% of tax rate in Q4FY12 and 21.8% of tax rate in Q3FY13. The jump in Other income further aided to the profitability of the company.

Valuation & Recommendation

The company has been able to report strong result in Q4FY13 and we believe that the company will be able to continue the momentum and will register good growth in the coming quarters. Zydus has re-launched EverYuth range whereas premium soaps and mens' fairness cream are also introduced. Zydus continued its brand building activities where the company has appointed actor Akshay Kumar for Sugarfree and Nargis Fakree for EverYuth as brand ambassadors. This coupled with 10-15% expansion in the distribution network is expected to support sales growth going forward. The company is focusing on improving the sales of its existing product portfolio and we believe that the company will able to register high double-digit revenue growth going forward. We have introduced FY15E estimates where the net sales are projected to grow by 20% YoY to Rs. 558.5 crore. At CMP of Rs. 543, the stock is trading at a PE of 20.1x in FY14E and 16.7x in FY15E. We have revised our estimates for FY14E on account of strong FY13 performance where the EPS grew by 6% to Rs. 26.3 per share in FY14E. We have achieved our target price of Rs. 570 per share in our Q3FY13 result update on 14th May 2013. We roll-over our target multiple from FY14E to FY15E to a target price of Rs. 630 per share (PE 20x FY15E) on the account of continued strong revenue growth, solid balance sheet, strong return ratios. We recommend investors to HOLD & BUY on decline the stock for further gain.

Source : Equity Bulls

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