Stock Analyst Choice

Nurturing Wellbeing

With a powerful product portfolio that appeals to both the aspirational class and the ill, Zydus Wellness is all set for long-term gain

An ever-increasing penchant of the modern Indian to look great and feel better drives this company's growth. The vision is to improve lifestyles, especially those looking for that perfect image at work and play - those who shun calorie-heavy food and those who are diabetic.

Zydus Wellness was the result of a merger and the subsequent business rationalising exercise (Carnation Nutra Analogue integrated into Cadilla Healthcare (CH)).

The majority shareholder is CH, which is one of the top five pharma companies in India. Its origins go back to the founding of Cadila Laboratories way back in 1952 by Ramanbhai Patel and Indravadan Modi They split and the Modi share was moved into a new company called Cadila Pharmaceuticals. CH became the Patel's holding company. At the turn of the millennium, CH opted for a public issue with Zydus Family Trust, controlled by the Patels, as majority holder.

The hectic pace of activity has ensured it grew from a single brand company with Nutralite, a butter substitute, to one boasting much more, including a fast-growing sugar substitute (Sugar Free) and a skincare brand (EverYuth).

It's also looking to broaden its portfolio and identified a still-nascent opportunity in men's habits (they are buying beauty products). The company, during the first few quarters of FY09, entered into the grooming segment with products like scrubs and sun-screen lotions. Acquisitions in the nutraceuticals space too is being eyed. This niche presence can drive fast-paced growth and the company may command a higher premium than other FMCG companies.

The fact that makes Zydus Wellnes such a high-flying entity is that it is the dominant presence in this niche segment, hogging a major portion of the marketshare. Its products are well-placed to take advantage of the changing health scenario in India. This is backed by WHO numbers, no less. Its estimates indicate that India would have the world's largest cardiac and diabetic population over the next two decades - the very people the company is servicing. And since the current professional and home chores are almost-labourless and combining that with the consumption of extra-rich food creates a population increasingly going diabetic - in fact, trends point to even kids being prone to diabetes now. Since sugar consumption is restricted for diabetic patients, it would naturally propel the demand for a substitute, while the butter substitute (margarine) would cater to the weight-watchers preferences. The market for a low calorie sweetener is growing, as per AC Nielsen, at 23 per cent.

Zydus Wellness has already established a huge lead in the space. Also, since the niche segment spins off revenues that don't interest the big FMCG players, competition is restricted to small companies, among which Zydus is a giant. For instance, it has two standout products - Sugar Free Gold and Sugar Free Natura. Its main competitors here are Wipro's Sweet & Healthy and Merisant's Equal. But their combined market share is just around 15 per cent.

Nutralite is the next product where Zydus is a market leader, it serves as an alternative to butter and it has the largest presence in the category with an over 75 per cent market share.

Zydus' other brand, EverYuth, under which it offers a range of skin care products, is a market leader in face mask scrubs, having a second-largest presence after HUL. Zydus is debt free. In a world that has just recovered from a recession, the fact that it is not burdened by debt carries huge significance. It gives the company leverage to finance expansion, or nullify rivals' advantages.

The company's performances have been positive, especially after the merger. It has reported improved sales, earnings and margins for FY09 - net sales grew more than 3 times and earnings over 5. However, earnings per share (EPS) eroded due to the increase on the equity side.

The risk to the company are two-fold: one is the fact that there have been concerns voiced of the side-effects of the artificial sweetener, like cancer. However, the US FDA has not banned it and India is unlikely to do so either. The other problem may come from FMCG giants, if they decide to enter this niche.

The stock has innate resilience too. In 2009, despite foreign institutional investors (FIIs) exiting the stock massively (FIIs' holdings fell from 10.8% to just 0.45%) the stock price jumped from just above Rs 70 to over Rs 270 by December, 2010. But the rising trend has stretched valuations thereby restricting investors' opportunities. However, a foray into another niche segment or a well priced inorganic acquisition with a strategic fit by the company could change the equation in its favour.

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