Buy Zydus Wellness; target of Rs 1925: ICICI Direct

ICICI Direct is bullish on Zydus Wellness has recommended buy rating on the stock with a target price of Rs 1925 in its research report dated August 03, 2020.

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August 10, 2020 / 12:59 IST

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ICICI Direct's research report on Zydus Wellness

Zydus Wellness (ZWL) posted 13.4% revenue fall given manufacturing, supply chain operations were disrupted in April. However, with manufacturing, supply chain stabilising, June saw double digit growth. Everyuth, Nutralite were impacted most as demand conditions were muted due to lack of ‘out of home’ activities. Nutralite derives 75% sales from HoReCa segment. Sugarfree saw robust sales growth with increasing health caution. Glucon D, which was impacted in April due to supply constraint, saw a gradual recovery in May & June. Complan saw flat YoY sales growth. We believe ZWL would have lost market share given Horlicks, Boost (HUL’s brand) saw 5% growth in Q1. It was a seasonal quarter for Nycil. The brand saw positive grown in May, June. Gross margins fell 356 bps as ZWL was holding higher skimmed milk powder (SMP) inventory at the start of quarter. Operating profit was flat & operating margin saw a 310 bps improvement with 650 bps, 295 bps saving in marketing, other overhead spends, respectively. This saving were partly offset by 282 bps rise in employee spend. PAT rose 10.9% to Rs 89.2 crore due to Rs 6 crore tax reversal.

Outlook

We believe ZWL has a unique product portfolio where it is a market leader in most categories and growing the market. We expect healthy revenue and strong earnings with sharp margin expansion in FY20-22E. The stock is available at 29.2x FY22E earnings. We value the stock 35x FY22E EPS and maintain our BUY rating with a revised target price of Rs 1925/share.

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