Zydus Wellness: Maintain ‘buy’; TP unchanged at Rs 2,500

Strong growth momentum continues: Reported revenue /ebitda/ recurring PAT grew by 24%/39% /85% YoY driven by strong performance of double-digit growth in most of the consumer brands (double-digit growth in 2-year CAGR as well) except for Glucon D as the summer season was delayed. Nutralite (75% is B2B business) also continued to witness sequential recovery.

Margins expanded despite higher ad-spends driven by input cost benefit and operating leverage: Gross margin expanded 70bps to 54.6% driven by better product mix and benefits of deflationary milk prices. However, reported ebitda margin expanded higher by 260bps to 24% despite significant step-up in ad-spends (+450bps YoY; +65% YoY) driven by operating leverage — lower staff cost (-300bps) and other expenses (-140bps) due to cost saving initiatives. Management stated that they are on track to reach ebitda margins of 20% by FY22.

Highlights: 1) OCF / FCF grew by 11% / 14% to Rs 2.9billion /Rs 2.7billion, 2) working capital days increased by 21 days largely due to higher inventory days and lower creditor days, 3) Direct reach increased to 0.55mn outlets, 4) E-commerce grew ~3x in FY21 (~3.6 of domestic revenues), 5) Exports business grew by ~2x in FY21 (~3% of overall business), and 6) launched 11 new products in FY21 (NPD now contributes ~3.5% of business).

Valuation and risks: We increase our earnings estimates by ~3% for FY22-23E. We model revenue /ebitda / PAT CAGR of 11% / 19% / 36% over FY21-23E – net profit likely to grow ahead of revenue and ebitda driven by deleveraging of balance sheet. Maintain ‘buy’ with a DCF-based unchanged target price of Rs 2,500. At our target price, the stock will trade at 35x P/E multiple Mar-23E.

Key downside risks are delays or failures in new product development or inability to expand distribution.