Zydus Wellness- Stock Analysis

Zydus Wellness is an FMCG company operating in the health and wellness industry. It is a subsidiary of the reputed pharmaceutical giant Cadila Healthcare. It offers leading brands such as Sugarfree, Nutralite and Everyuth. Its recent acquisition of Heinz India helped it expand its product portfolio adding brands like Complan, Nycil, Glucon-D and Sampriti Ghee. It also helped increase Zydus’ distribution network adding 800 distributors and 20000 wholesalers across the country. 

What is Good?

The products have huge market share, stand outs being Sugarfree and Everyuth peel offs which have over 94% and 86% market share respectively. Increasing health awareness in India expanding the market for Zydus. The products also have strong brand recall. It also enjoys good margins due to limited competition which acts as a economic moat for the company.The company is backed by strong promoters Cadila Healthcare who own 72% of the shares in Zydus. The acquisition of Heinz India was also backed by their promoters.

 Management Analysis-

Zydus Wellness is a subsidiary of Cadila Healthcare which boasts of reputed management. The management has consistently focused on consumer health and wellness products and has refrained from putting its foot into unrelated segments. This strategy has led most of its products to emerge as market leaders. The management has also been able to give consistent returns to its shareholders, though growth could be a bit higher given that their products are market leaders. The management has done well to retain its margins by staying ahead of the competition across the years. Zydus was debt-free until they raised debt to finance the Heinz acquisition. They have a clear plan set out a plan to clear their debt within 3 years. The Cadila Group has always been expert in managing debt. The acquisition was majorly backed by the promoter group. Also, the acquisition looks like an extremely good move to increase revenues and earnings.

Management score: 9/10

Industry Analysis-

The world’s lifestyle changes have reduced consumers’ physical activity to a very large extent. These changes have been the cause of an increase in lifestyle disorders such as diabetes. The consumers are becoming increasingly health-conscious and preventive measures are becoming more popular. The consumer wellness industry is growing at a CAGR of 9.5% Yoy and the growth rates are expected to increase to a rate of over 10% within the coming 4 years. The industry has a widespread product portfolio. There are a lot of products that cater to several niche markets.

Industry score: 8/10

Business analysis-

Zydus being an FMCG business has a typical FMCG business model. It has a wide distribution network across the country. Its supply chain includes manufacturers, distributors, wholesalers, and retailers. The Heinz India acquisition helped boost this network by adding over 800 distributors and 20000 wholesalers and 17 lakh retailers across the country. Also, Zydus operates in a segment where competition is limited. Its Sugarfree boasts of a 94% market share in the sugar substitute industry and Everyuth has a strong 86% in the peel offs segment. The business has been able to successfully scale-up in the wellness industry across the years. 

Watch our complete video on How to Find Undervalued stock

Business score: 9/10

Valuation analysis-

• The stock is currently trading at a PE of 52.61
• The company has acquired Heinz India due to which its revenues are expected to triple. However, it has raised a significant amount of debt to finance this acquisition. The repayment of this debt is planned across three years due to which the earnings of the company may take a hit. However, once the debt is paid, Zydus is expected to witness a rapid increase in earnings.

Assuming a CAGR growth in revenues of 9% and using the industry PE of 40 we arrive at the fair valuation of the company. Zydus is marginally over-valued in my opinion, but this is purely based on personal opinion. The valuation is based on our earnings estimates, but the company surely has the potential to surprise. 

Valuation: 6/10

Disclaimer- The article is for educational purposes only. Nothing in this article should be interpreted as investing advice.

Disclosure- We might have recommended this stock to our advisory clients.