REPORTS WEAK SET OF NUMBERS - ZYDUS WELLNESS LATEST QUARTERLY RESULTS

Zydus Wellness – Q3FY23 First Cut

(CMP - Rs 1394, MCap - Rs 8870 crore)

Q3FY23 Earnings Summary

Revenue witnessed a growth of 7.1% to Rs 415.6 crore (I-direct estimate: Rs 439.7 crore) largely led by pricing growth. High inflation has been adversely impacting rural demand conditions in turn resulting in subdued volumes. Though, some of the commodity prices like palm oil have corrected in last six months, key raw material for the company like Milk has still remain at an elevated levels. Milk prices are up 26% on YoY basis

The company gained market share in Glucon-D, Nycil, Everyuth Srubs & Everyuth Peel-off by 161 bps, 121 bps, 160 bps & 22 bps respectively. It hold market share of 95.8% in Sugar Substitute category. Glucon-D and Nycil holds the market share of 59.9% & 35.1% respectively. Everyuth command market share of 41.8% in Scrubs & 78.4% in peel off category. Complain lost market share by 66 bps to 4.5% during the quarter. The high inflation is a drag on HFD category sales in last one year

Gross margin continues to slide 440 bps on YoY basis mainly due to continuous increase in milk prices, which is key raw material for the company. However, gross margins improved slightly 60 bps sequentially given the company is taking price hike to pass on the impact of high inflation. Zydus cut advertisement spend by 305 bps during the quarter. Employee spend is also down by 140 bps in Q3. Overhead spends was up 159 bps during the quarter.

Operating profit declined by 12.7% to Rs28.2 crore (I-direct estimate: Rs 31.6 crore) with margin contraction of 154 bps to 6.8%. Interest cost down by 40.2% to Rs3.8 crore mainly on account of reduction in debt levels. Net profit de-grew by 15% to Rs 19.6 crore (I-direct estimate: Rs 23 crore)

Channel mix is shifting towards modern trade & ecommerce channel with their sales contribution increasing to 20.3% in 9mFY23 from 17.6% in 9mFY22. The company has direct distribution reach of 0.6 million outlets & it plans to reach 1.0 million reach in next three years. Its overall distribution reach is 2.5 million retail outlets equally divided between rural & urban regions

View: Zydus wellness continue to witness dismal demand conditions on the back of high inflation in milk prices. However, Q2 & Q3 is generally low sales quarter for the company as summer brands like Glucon-D & Nycil contributes largely in Q4 & Q1. We believe the company is following a right strategy of increasing distribution reach, extending brands in similar categories (or adjacencies) & investing high amounts towards advertisement. We believe cool down in milk & other commodity prices would bring back volume growth specifically in peak summer season of Q4 & Q1.

Impact: Negative