Sharekhan is bearish on Zydus Wellness and has recommended reduce rating on the stock with a target of Rs 520 in its August 25, 2014 research report.
Sharekhan`s research report on Zydus Wellness
“Multinational Johnson & Johnson India (J&J) has decided to become aggressive in the domestic skincare market after the discontinuance of the sales of some of its baby care products (following an FDI order) in the domestic market. J&J has a presence in the domestic skin care segment through its brand Clean & Clear. It is the fourth largest player in the domestic face wash category (HUL is no.1 with more than 30% market share, Zydus Wellness has less than 5% market share). J&J might launch some of the products from its international portfolio in the face wash, scrub and skin cleansing categories, which are currently at a nascent stage in India but have a strong potential to grow in strong double digits in the medium to long term.”
“J&J’s move to become aggressive in the domestic skin care market would heighten the competition for smaller players like Zydus Wellness, which is bearing the brunt of a limited portfolio in the domestic market. Zydus Wellness’ Everyuth brand is the market leader in the domestic peel-off (over a 90% market share) and scrub categories. If J&J and other multinationals become aggressive in the scrub category it would put significant pressure on Zydus Wellness’ market share in the coming years. Zydus Wellness’ revenues have stood flat or marginally declined in the past three to four quarters as increased competition and cut in spending in the discretionary categories have affected the sales of its Everyuth brand while Nutralite (its margarine brand) continues get a lower preference amongst the domestic consumers. Also, the margins of its skincare portfolio have come under pressure due to increased competition from HUL and other players.”
“Though the company is banking big on its new “Go to market” distribution strategy, but its limited product portfolio and inability to add successive products and variants make it difficult for it to compete with the large players. Hence, we believe growth uncertainties would remain in the near term unless Zydus Wellness gets aggressive (ie launches new products or enters new categories). We maintain our Reduce rating on the stock with an unchanged price target of Rs520. The stock is currently trading at 24.1x its FY2015E EPS of Rs24.8 and 20.8x its FY2016E EPS of Rs28.7,” says Sharekhan research report.
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