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Stock Review: Zydus Wellness

Being Debt-Free Will Support Company's Acquisition Plan

 

THE stock of Zydus Wellness has more than doubled in the past nine months and is currently trading at a price-earning multiple of 43. Several operational as well as external reasons support the current valuations and still make the stock attractive.


   Zydus Wellness, a 73% subsidiary of Cadila Healthcare, operates in niche health and skincare segments. Among other products, its portfolio includes low calorie sugar and low cholesterol alternative for butter. According to the information provided by the company in its presentation, all these categories are growing at a compounded annual growth rate (CAGR) of more than 25%.


   The healthy growth rate can be attributed to the company's strategy to focus in aggressive advertising and promotion of its products. As such, its ad spends relative to sales are much higher at over 20%. The company's repertoire of brands includes Sugar Free, Nutralite butter alternative and Eve-rYuth skin care solutions.


In the first half of FY11, the company has maintained its high growth rate. Its net sales increased by 30%, operating income by 35% and net profits by 56%, when compared with the year-ago levels.


Zydus currently commands 80% market share in the low calorie sugar segment. To leverage its market lead further, it is expanding the market by introducing low calorie beverage products.


   The company's Sikkim unit, which is in the tax-free zone, is expected to commission from the first half of 2011. This is expected to reduce its tax burden from the current level of over 35% to around 25%, which would support net margin.


   Since it caters to niche markets with low competition, Zydus enjoys pricing power, which is a shield against increasing raw material prices. However, a concern is that the company has to improve its presence across the country by expanding to more number of retail shops. According to a report by Anand Rathi Research, the company's products are sold by over half a million retail stores in the country, much lower than its bigger peers.


   It reported cash and equivalents of . 98 crore as on September 31, 2010. In the past, the company had adopted the inorganic strategy to grow by acquiring Nutralite. The management has indicated that it would look for more acquisitions in the future. Given its cash position of . 98 crore as on September 2010, and the fact that it is debt free, the company has re-sources to fulfil its inorganic growth targets.

 

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