| Summary of Contents STOCK IDEAS Zydus Wellness
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs235
Current market price: Rs184
Wealth in health
Key points - Strong brands in fast-growing niche segments: Zydus Wellness owns strong brands Nutralite (34% of turnover), Sugar Free (39% of turnover) and EverYuth (26% of turnover) that have literal dominance in their fast growing categories. While Nutralite has a market share of 75% in the margarine (a low-cholesterol butter substitute) market, its sales have doubled in the past three years, in line with the trend in the category. Similarly, both Sugar Free, with an 82% market share in the low-calorie sugar substitute space, and EverYuth, with its stronghold in the facial peel off, scrub and face wash categories of speciality skin care products, have grown at a CAGR of 25% over the same period.
- At an inflexion point: Given the proliferation of the lifestyle diseases, mainly those related to heart and diabetes, and the increasing awareness regarding health and fitness, Zydus Wellness? product basket has the potential to sustain a high growth in the medium to long term. We expect the company to grow its sales at a hefty CAGR of 26.5% over FY2009-12 on the back of handsome growth in the existing products, new products, brand extensions and an improved distribution reach. With its operating profit margin exceeding 20%, the company?s profits are expected to grow at a strong CAGR of 30.3% over FY2009-12.
- Healthy return ratios and free cash flows: Zydus Wellness is a debt-free company with free cash of Rs72 crore on its books. It runs the business on advance collection terms from distributors and customers. This implies minimal working capital blockage and zero bad debt risk. Given the strong internal accruals, the company will not require any equity or debt financing to sustain its organic growth and will be able to pay good dividends on a recurring basis. Like most of the sound FMCG companies, Zydus Wellness has strong return ratios with its RoE and RoCE exceeding 40% and 60% respectively.
- Attractive valuations: The stock is trading at 20.4x its FY2010E earnings and 15.7x its FY2011E earnings and appears attractively priced at these valuations, considering the company?s sound business proposition, strong financials and the prospect of sustainable high growth over the next few years. We initiate coverage on the stock with a price target of Rs235 that is derived on 18x average of FY2011E and FY2012E earnings (period ending September 2011) and offers an upside of 27.5% from the current market price of Rs184.
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