ICICI Direct is bullish on Zydus Wellness has recommended buy rating on the stock with a target price of Rs 1530 in its research report dated June 03, 2020.
ICICI Direct's research report on Zydus Wellness
Zydus Wellness (ZWL) reported 17.2% growth in sales with two months of acquisition sales in base quarter (acquisition of Heinz India effective from January 30, 2019). Hence, numbers are not comparable. However, it lost ~Rs 100 crore sales in March due to lockdown. The month contributes substantial summer product sales (Glucon D, Nycil). Gross margins were down 587 bps mainly due to higher milk prices & change in composition of products due to acquisition. However, ZWL reduced marketing spend by 30% (650 bps) & other overheads by 9% (390 bps) leading to operating profit growth of 38.1%. Operating margins improved 325 bps to 21.5%. Despite strong growth in operating profit, net profit grew 11.5% with lower other income, higher interest cost & integration related exceptional expense.
Outlook
With the acquisition of Heinz India brands, ZWL has created goodwill of Rs 3900 crore. With huge goodwill on books, return ratios would remain depressed for the next three to five years. However, we believe the company would be able to grow the earnings faster in this period with a repayment of Rs 1500 crore debt and substantial reduction in interest. The stock is available at 26.5x FY22E earnings. We upgrade the stock from REDUCE to BUY with a revised target price of Rs 1530/share.
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