We are recommending Buy on our Actionable Ideas "Zydus Wellness" as per following:-
CMP: Rs 1758 Target: Rs 1935 (10% Upside)
Key Points:
Zydus Wellness: Stock Update - Growth momentum to sustain
· Stock moved up by 28% in the past two months: The stock price of Zydus Wellness Limited (ZWL) has moved by 28% in the past two months, inline with strong surge in the FMCG basket. The strong surge in the stock price can also be attributed to pick-up in business fundamentals of the company in the past four quarters. Revamped distribution and new product launches aided the company to maintain a leadership position in key categories and achieve strong revenue growth in the past four quarters. Though the current valuation of 36x is higher than its historical average, it is lower to some of the mid and largecap FMCG stocks. This makes the company one of the better picks in the FMCG space.
· Presence in niche category to drive performance: ZWL has a strong presence in niche consumer categories, which cater to the specific needs of diverse consumer groups, offering healthier alternatives to conventional lifestyle choices. The company is a market leader in categories such as sugarfree (market share of 94%) and peel-off (market share of 86%). Based on the formula of adhering to consumers' health needs, the company has continuously added new products/variants into its kitty to maintain its strong position in key categories. ZWL has recently launched products such as Sugar Free Green, a 100% natural sweetener made from Stevia leaves; Nutralite mayonnaise – launched in various flavours; and Everyuth Neem Papaya Scrub. All these products have received good response in the domestic market (Sugar Free Salvia has already achieved more than 2% market share in the domestic market).
· Balance sheet continues to remain strong: ZWL has one of the strongest balance sheets in the FMCG space with negative working capital and strong cash balance of over Rs. 400 crore. The company has consistently managed to improve its working capital with operating cash cycle standing at negative 44 days in FY2018 as against 38 days in FY2017. Dividend pay continues to remain strong with dividend payout standing at 80% in FY2018 as against average of 63% in the past four years. Strong cash flows aided the company to expand its base in international markets (currently present in 11 countries).
· Retain Buy with an upgraded PT of Rs. 1,935: We expect revenue and PAT of ZWL to report CAGR of 16% and 18%, respectively, over FY2018-FY2020. In view of strong earnings visibility and discounted valuations to mid and large FMCG stocks, we maintain our Buy recommendation on the stock with an upgraded price target (PT) of Rs. 1,935 (valuing the stock at 40x its FY2020E earnings).
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