On the back of the accelerated launch of innovative products, growing international footprint, and expanding customer base, domestic brokerage house BoB Capital Markets (BoB Caps) remains highly positive on the FMCG stock Zydus Wellness.
The brokerage has a 'buy' call on the stock with a target price of ₹2,185, indicating an upside of around 34 percent from its current market price of ₹1,636 (as on June 30). The brokerage said that the firm is in a sweet spot.
The stock has declined 22 percent in the last 1 year, however, it has recovered and added 15 percent from its 52-week low of ₹1,431, hit in February 2022.
"We retain buy on the back of new launches, increasing distribution strength, a broader presence through existing brands, its ability to cater to white spaces, and a strong gross margin which gives it the leeway to spend more on brand building. We are also positive on the firm’s debt reduction measures, faster free cash flow (FCF) generation and superior execution," BoB caps said in a recent note.
The brokerage added that leading niche wellness brands (Sugar-Free, Everyuth, Glucon-D, Nycil) and low market penetration rates offer long-term growth opportunities to the stock. It also likes the company’s focus on distribution expansion and growth longevity with strong positioning.
As per the brokerage, the average penetration level of the combined portfolio brands stands at 20 percent (12-24 percent across categories) signifies higher growth headroom versus its FMCG peers.
"Theoretically, increase in penetration is one of the growth planks for a category’s growth longevity. Further, management’s quest towards improving brand awareness (ad spends at 14 percent of revenue) and four-five new product/variants launches will not only improve penetration but also support double-digit growth in the foreseeable future," highlighted BoB Caps.
Further, the brokerage is also bullish on the stock due to its strong outlook for international business. Its Sugar-Free and Complan brands constitute 93 percent of international business. The company has also entered new markets such as Hong Kong, Lebanon, Zimbabwe, Muscat, Ethiopia and Australia in FY22. Management has guided for high-double-digit growth in the international business, likely crossing ₹100 crore in revenue in FY23, noted BoB Caps.
Zydus' target is to have 8-10 percent of revenue from the business in the next 4-5 years from 4 percent in FY22, it added.
It also believes that restructuring of the distribution channel will continue to yield benefits as consumer sentiments improve and penetration levels rise across categories in which the company operates.
Zydus Wellness is a unique play on India’s emerging health & wellness category and enjoys market leadership in various niche segments with limited competition from large FMCG companies, said BoB Caps.
Zydus Wellness is a consumer wellness company that operates as an integrated consumer company with business encompassing the entire value chain in the development, production, marketing and distribution of health and wellness products. The product portfolio of the Company includes brands, such as Everyuth, Nutralite, Complan, Glucon-D, Sugarlite, Everyuth, Nycil and Sugar-Free D’lite.
However, failure of new launches, aggressive competition from start-ups, inability to scale up acquired brands, rise in raw material prices, and economic slowdown/pandemic risk are key downside risks, noted the brokerage.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
