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  • 03 Feb 2022
  • ICICIdirect Research

ZYDUS POSTS SALES GROWTH, GROSS MARGINS UNDER PRESSURE

ZYDUSWELL - 2077 Change: 49.40 (2.44 %)

News: Zydus Wellness reported a disappointing set of numbers with mere 1.7% revenue growth & 466 bps contraction in operating margins. Revenue witnessed slower growth of 1.7% to Rs.388.1 crore. We believe the company has taken some price hikes in last few quarters suggesting volumes de-growth during the quarter. Gross margins contracted by 636 bps mainly on account of elevated palm oil, Milk & crude based packaging material prices. With savings in employee spends & overhead spends to the tune of 20bps & 30bps, the company was able to absorb some costs. It also cut down advertisement spends by 118 bps. However, this was not sufficient to protect operating margins. Operating profit witnessed a de-growth of 34.8% to Rs.32.3 crore & operating margins contracted by 466bps to 8.3%. Net profit grew from |1.7 crore to Rs.22.7 crore mainly due to exceptional expense in base quarter to the tune of Rs.34.2 crore related to premium on pre-payment of NCDs. Adjusting for that, the company witnessed earnings de-growth of 36.7%.

Views: Similar to most FMCG companies, Zydus also felt the heat of elevated commodity inflation. Palm oil, milk & crude based packaging costs have been the major raw materials for the company and all have seen very high inflation in last one year. The company has also seen volume de-growth (our estimate) during the quarter due to high base & slowing demand condition in smaller towns & rural regions. We believe slower growth & inflation related headwinds would continue for at least two quarters. The company is trying to grow its categories & brands with brand extensions & expanding distribution reach. We believe the company has leeway to expand high on advertisement given strong gross margins. The growth is likely to come back in next few quarter with the expected normalisation in commodity prices. The stocks is trading at significant discount to major FMCG peers.

Impact: Neutral