Businesses I Like

Note on Zydus Wellness Limited   (16.07.2009)

Business

• Zydus Wellness (ZW) is a company formed out of a scheme of arrangement between Carnation Nutra- Analogue and Cadila Healthcare Limited.  The consumer products division of Cadila Healthcare was demerged and transferred to Carnation Nutra, whose name was later changed to Zydus Wellness Limited. The scheme has come into effect from April 1, 2008.
• The company is into the business of innovating and developing niche wellness products which can be categorized into "preventive medicare".
• ZW has 3 brands in its portfolio : Nutralite , Sugar Free and EverYuth.
• Nutralite is a premium table spread margarine which is a leading butter substitute. This table spread is made from pure refined vegetable fats which are free from transfats and hydrogenated fats. Sales of this brand was 66 crs in FY 09 which grew at 20% compared to FY 08.
• Sugar Free is India's largest selling low calories sweetner with a market share of 80%. Sales of this brand was 77 crs in FY 09 which grew at 16% compared to last year. It is available in 3 variants :

• Sugar Free Natura : Sucralose based and made from sugar. 
• Sugar Free Gold : Aspartame based sugar substitute molecule.
• Sugar Free De'lite : Ready to drink and powdered soft drink concentrate. 
• EverYuth is into speciality skin care products. The company calls this segment cosmeceuticals. This consists of soap free face-washes, face masks and scrubs. It is market leader in scrubs with 69% market share and peel offs with 98% market share. The total sales of this brand was 50 crs ; up 66% from last year.

Valuations

• No of shares        : 3.907 crs 
• CMP                 :  120
• Market Cap          : 469 crs 
• Borrowings          : Nil
• Cash & others       : 51 crs
• Net Sales           : 196 crs
• EBITDA             : 39.8 crs
• EBITDA %           : 20.3 %
• Dividend           : Rs 1.50

Positives

• The company has strong brands with top of mind recall. Brand building exercises are undertaken by the company which include high expenditure on advertising and celebrity endorsements. Current brand ambassador for Sugar Free is Bipasha Basu. In the past, in film brand placements have been done for Sugar Free in Amitabh Bachchan's movie " Cheeni Kum", titled appropriately for the company.
• ZW is innovative in finding the gaps in the consumer needs and the products available. The products are envisaged and the brands are developed by the company while the manufacturing is outsourced to third party manufacturers. This limits the capital employed by the company in the business.
• The business generates very high return on capital. The total capital employed in the business is 70 crs ( 39 crs in Net fixed assets and 31 crs in Net current assets) and the cash generated from operations for FY 09 is 61 crs. Subsequent performance has to be observed to find the sustainability of such high returns on capital.

Concerns

• Price undercutting by new players is big concern. The products can be easily copied.
• Commanding prices are enjoyed by large retail chains like Barista ,Cafe Coffee Day etc which are big consumers of Sugar Free.

The business looks very interesting with solid brands, high margins and high ROCE. The category in which the company operates should enjoy high growth rates and the company's brand being the leaders should grow commensurately. The key being in maintaining the brand leadership and brand recall which the company is managing pretty well.

The valuations are expensive at this time but definitely a company to be kept on the radar.