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  • 01 Aug 2022
  • ICICIdirect Research

ZYDUS WELLNESS REPORTS Q1FY23 NUMBERS

ZYDUSWELL - 1804 Change: 0.15 (0.01 %)

News: Revenue witnessed a strong recovery with 16.6% growth to Rs 696.8 crore led by 10.3% volume growth & 6% pricing growth. The growth was led by healthy demand of summer products (Glucon-D, Nycil). However, 3 Year CAGR sales growth was 4%(3.0-3.5% volume growth), which is below brands potential growth. With the continued upsurge in major commodities like milk, crude based packaging costs, gross margins contracted by 112 bps during the quarter. Though, palm oil prices have witnessed softening in last one months, we believe the benefit of that would be reflected in coming quarters only. The company increased its ad-spend by 221 bps in order to spend behind summer brands in the season. Employee & overhead spends were lower by 72 bps & 38 bps respectively. The contraction in gross margins & high advertisement spend resulted in operating profit growing at a slower pace of 5.5% to Rs148.1 crore. Operating margins contracted by 224 bps to 21.3%. Net profit also grew at a slower pace of 4.7% to Rs137 crore in line with operating profit growth.

Views: Zydus was adversely impacted by Covid-19 in last two years given summer months constitutes major sales. The strong growth in Q1 reflecting recovering to the pre-Covid levels but on a three-year CAGR basis, sales growth is still below par at 4%. Simultaneously, high inflation in milk, palm oil & crude based packaging costs resulted in contraction in gross as well as operating margins. We believe high inflation has also impacted demand given most brands are niche & discretionary in nature. We expect softening of commodity inflation would recover margins & perk up volumes in next few quarters. We believe efforts towards launching new variants in most of the brands, building direct distribution network & leveraging E-Com & Modern trade channel would result in stronger volume growth from H2FY23 onwards. The stock is trading at significant discount to its FMCG peers.

Impact: Positive.