Zydus Wellness - Expect sustenance in revenue growth with stability in brand performance - PhillipCapital

Zydus Wellness (ZYWL) Q1FY14 results disappointed on revenues raising concerns once again on the lack of sustenance in revenue growth by the company. As expected earnings growth was higher than estimates on account of certain tax adjustments. We expect the revenue growth for the company to improve going ahead in FY14E but we estimate the pace to be slower than earlier expectations as cut in discretionary spends is expected to limit growth trends in Everyuth brand. However we believe in the managements ability to improve the saliency of the Everyuth brand on a medium to long term basis, which along with the Sugar free brand is expected to drive 15% revenue CAGR and 16% earnings CAGR over the next 5 years. We maintain BUY recommendation on ZYWL but now rank it lower in our pecking order of top BUY stock ideas in the Indian FMCG sector.

Revenue growth at 11% YoY disappoints as Everyuth brand growth also comes under pressure: As per the management SugarFree brand growth has been robust but along with Nutralite brand even Everyuth witnessed pressure. It is to be noted that there was certain channel filling in the Everyuth brand in Q4FY13 which is estimated to have impacted sales in Q1FY14. The sluggish performance was primarily in Everyuth Facewash wherein category growth rates have slowed down due to cut in consumer discretionary spends and also competitive intensity remains elevated. Also as per our channel checks in certain channels like Chemists on account of non clearance of Everyuth stock in old packs the new pack stocks have been unable to replenish the shelf space. The management has earlier stated that the old stock will not be recalled, but we raise this as a concern which needs to be resolved for sustenance in Everyuth brand growth to ensure lack of channel disruptions. Also ZYWL is to undertake a new product launch in Q2FY14, we will have to wait and watch to understand its potential revenue generation.

Gross margins expand by 130 bps YoY primarily on account of revenue mix: Higher Gross profit growth at 13% YoY was aided by revenue mix with higher contribution from the high margin SugarFree brand. We expect the company to report Gross margin expansion of 50 bps YoY to 68.5% in FY14E led by SugarFree and Everyuth brands.

EBITDA margins up marginally by 10 bps YoY: Ad to sales ratio was lower by 40 bps YoY at 30.7%, however staff cost and Other operating expenses increased by 110 bps YoY and 50 bps YoY respectively. Staff costs being negatively impacted by new hiring at senior management level. We maintain our estimate of Ad to sales ratio at 18.3% in FY14E and expect recovery in media spends in the forthcoming quarters.

Tax adjustments yet again drive robust PAT growth of 68% YoY: PAT at Rs. 228 mn was significantly ahead of estimates as along with the utilization of MAT credit the company undertook certain tax writeback on depreciation on goodwill created. As against the earlier guidance of tax rate at 8 û 9% in FY14E, we expect the tax rate at 4.4% for FY14E. Hence while PBT growth is expected at 12.5% YoY, PAT growth is estimated at 17% YoY.

Downward Revision of estimates and target price, Maintain BUY recommendation: We have revised our estimates downwards primarily on revenue. We value the company o a DCF based methodology with a revised target price of Rs. 655 (earlier Rs. 693). We expect muted operating performance in FY14E but remain confident of recovery to robust growth trends and better sustainability in operating performance in the long term. We maintain our BUY recommendation on the stock.

Source : Equity Bulls

Keywords