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Zydus Wellness Ltd Management Discussions

1,706.85
(1.70%)
Apr 2, 2025|12:00:00 AM

Zydus Wellness Ltd Share Price Management Discussions

GLOBAL ECONOMY OVERVIEW

According to IMFs World Economic Outlook (April 2024), global economic growth is estimated at 3.2 % in 2023 and is expected to grow in same pace for 2024 and 2025(1). The pace of growth is low, owing to both near-term factors, such as still-high borrowing costs and longer-term effects from the COVID-19 pandemic and Russias invasion of Ukraine; weak growth in productivity; and increasing geoeconomics fragmentation.

Global headline inflation is expected to fall from an estimated 6.8 % in 2023 (annual average) to 5.9 % in 2024 and 4.5 % in 2025(1). As global inflation descended from its mid-2022 peak, economic activity grew steadily, defying warnings of stagflation and global recession. Employment and income growth held steady, reflecting supportive demand developments such as greater-than-expected government spending and household consumption. The unexpected economic resilience, despite significant central bank interest rate hikes aimed at restoring price stability, also reflects the ability of households in major advanced economies to draw on substantial savings accumulated during the pandemic.

INDIA ECONOMY OVERVIEW

The Indian economy reported GDP growth of 7.2% in FY 2022-23. With strong economic activities across key sectors the economy registered GDP growth of above 8% for first three consecutive quarters of FY 2023-24. Key sectors such as manufacturing, construction, defense and real estate continued to do well and reported very good growth for FY 2023-24, while there was bit of moderation in growth of agriculture sector for the financial year. As a result the GDP growth for the quarter four of FY 2023-24 was reported at 7.8% and 8.2% for FY 2023-24.

Going forward GDP growth is expected to moderate and grow in the range of 6.6% to 6.8% in FY 2024-25. The slow down mainly reflects a deceleration in investment from its elevated pace in the previous years. Growth in services and industry is expected to remain robust, aided by strong construction and real estate activity. Exports will continue to grow, especially for services such as information technology and consulting where India will continue to increase its global market share, supported by foreign investment. Headline inflation will decline gradually with housing prices and wages rates will progressively moderate, although uncertainty about food inflation remains elevated. This will allow interest rates to be lowered. Over the medium term, the fiscal deficit and government debt are projected to decline, supported by robust output growth and consolidation efforts by the central government.

FMCG SECTOR OVERVIEW

During calendar year 2023, Indian fast-moving consumer goods (FMCG) sector growth was fueled by higher consumption as price growth has slowed as inflationary pressures have eased out gradually during the year. Both the Urban and Rural markets showed a positive uptick and an increased willingness to spend.

Rural consumption growth was lagging behind urban growth during calendar year 2023, however it has gradually picked up pace and has surpassed urban consumption growth in quarter 1 of calendar year 2024 as per latest report of Nielsen(1).

Within the broader FMCG industry, large players continue to demonstrate stronger performance compared to small players. Despite this, smaller manufacturers have seen higher volume growth rates in non-food categories compared to large companies. This might be because smaller players face challenges in keeping prices stable in the food sector, while non-food categories with significant price increases have experienced higher volume growth.

The Indian FMCG industry, a cornerstone of the nations economy, is poised for good growth in the calendar year 2024, albeit at a moderate pace compared to the previous year. The rural consumption growth converging with that of urban along with the industrys remarkable ability to navigate complexities and adapt to evolving market dynamics are likely to play the key factors underpinning the growth outlook for 2024.

(1) NielsenIQ India FMCG Quarterly Snapshot Q124

YEAR 2023-24 FOR THE COMPANY

During Financial Year 2023-24, the Company reported total revenue from operations at Rs 23,278 millions (+3.2% YoY). During the year the FMCG sector witnessed demand pressure as consumption growth was slow for both urban and rural. The expected buoyancy in rural demand was more lagging during major part of the financial year due to erratic monsoon and low growth in agriculture sector, however the rural consumption growth gradually picked up and surpassed urban in quarter 4 of financial year 2023-24. For the Company, the personal care segment witnessed a very strong double-digit growth for the financial year, while the food and nutrition segment reported a flattish growth for the financial year. Some of our key brands falling in the food and nutrition segment faced negative headwinds from external factors impacting their sales during the year. The Company proactively addressed concerns raised by global regulatory body over the impact of consumption of non-nutritive sweeteners by taking various measures like releasing videos in vernacular language assuring safety of consumption of Sugar Free, organising conferences with veteran doctors and key opinion leaders. The consumption of aspartame continues to be safe at recommended levels. This was coupled with unseasonal rains witnessed pan-India. The off-takes of Glucon-D got impacted due to the same during the financial year.

As the country witnessed stabilization of inflation across commodities during the financial year, the Company also saw a gradual reduction of rates for its key inputs like milk and refined palm oil. With calibrated price increases taken across portfolio and efficient hedging strategy for key inputs, the Company has registered a good recovery of gross margin consistently over the last three quarters of the financial year over previous year comparable periods. As a result the Company has reported gross margin on net sales of 50.8% for the financial year 2024, which is an increase of 193 basis points on a Y-O-Y basis.

The Company continued to be the leader in five out of the six categories it operates in. The Company continues to strengthen the competitive positioning and market share across brands through strong distribution, category expansion and investments in product innovations, media campaigns, sales promotions, and digital initiatives. The Company meets the need of over 50 millions consumers every year through multiple online and offline channels including 3 millions stores that stock Zydus Wellness products. This is a testament to brands and our go to market capability built to meet consumers daily needs and varying shopping baskets.

The Company continued to deliver on the three key pillars that supported growth during 2023-24:

A. Acceleration of growth of core brands:

The Company continued to support the growth of existing and new products with marketing initiatives and its Go-To-Market strategy.

Glucon-D – Resilient performance despite seasonal challenges

• New campaign launched for drive relevance, ‘Thakaan Gone, Energy On.

• Launched ready to drink format i.e. Glucon-D Activors Electrolyte Energy drink, with pilot launch in couple of key states during quarter four of the financial year.

Complan – Supporting brand focused communication

• Revamped the brand pack price architecture with launch of sachets and pouches nationally.

• Volume offtake progressively improved quarter on quarter for the brand.

• Continued to support the brand with new campaign emphasizing nutritional differentiation of the brand with onboarding popular celebrities Madhuri Dixit and Sneha Prasanna.

Sweeteners – Driven by the natural variant of Sugar Free Green

• With a 360 degree campaign, Sugar Free Green consistently registered a double digit growth over last three financial years.

• Proactively addressed concerns around consumption of non-nutritive sweeteners through discussion forums with veteran doctors and key opinion leaders and awareness campaigns in regional languages.

• Launched Imlite, a unique formulation of sugar blended with stevia to offer consumers 50% less calories than regular sugar.

Nycil – Category leading performance

• Continues to be number one brand in the prickly heat powder category.

• Registered strong growth ahead of the category, despite intensive competitive scenario building around the category.

Everyuth – Outpacing the category growth

• Demonstrated a sustainable growth momentum over the years driven by superior product experience with double digit growth during the financial year and over 4 year CAGR.

• Core portfolio i.e. Scrub and peel off both continues to strengthen its leadership with growth in volume market share.

• TV and digital campaigns continued to enhance the growth of core portfolio comprising face wash, scrubs, peel off and body lotions.

Nutralite – Volume growth driven by Dairy and spreads portfolio

• Continued to support the brand with digital media, e-commerce channel activations and various. customer engagement activities like Chef Meets and participation in food exhibitions.

• Focused celebrity engagements with Shilpa Shetty and Chef Sanjeev Kapoor to drive growth.

B. Build International Presence:

• The Company aims to build scale in international business by focusing on key regions like SAARC, MEA, SEA and ISC, entering new geographies and introducing innovations and extensions catering to the needs of international markets. During the financial year the Company continued to build strong foundation across markets with double digit growths led by South Asia and GCC markets. The Complan and Sugar Free franchise are the lead brands in the International market.

C. Significant initiatives to grow scale and improve profitability:

The Company has taken various initiatives to increase consumer base and improve profitability.

• As the world witnesses shift in consumer desires, choices and how they access them, the Companys prime focus is to innovate new products and extensions that fit into the consumers evolving preferences and bring novel solutions for category expansion. With the strong R&D team and new state of the art R&D facility at Ahmedabad, the Company has a strong new product pipeline in place which could be launched at an appropriate time based on the market requirements and consumer needs. We ensure that all our new products are well researched and scientifically backed and substantiated. During the Financial year the Company launched Glucon-D Activors Electrolyte Energy drink a ready to drink format to further expand the brand presence in domestic market, Sugar Free Dlite product extentions for International business like Granola bars, Granola, instant coffee and hot chocolate premix, chocolate minis, butter cookies and Complan Young champs in Nigeria for kids aged 5 years to 15 years.

• In todays competitive market, its crucial to identify the most effective channels for reaching potential and existing customers together and increase overall penetrations of its brands. The Company continues to drive growth of its iconic brands through reimagined narratives and exploring new approaches to media exposure for our brands to achieve consumer connection with greater precision. The Company has been able to increase overall penetration of its key brands. For example, Complan Household Penetration grew by 9.7%, Glucon-D Household Penetration grew by 10.4%, Nycil Household Penetration grew by 24.7% as per Kantar World Panel Report as on MAT February 2024. This reflects Companys innovative market practices and on ground execution capabilities to drive the penetration.

• Over past two years the Company completely switched from distribution led model to doing direct business with all modern trade and e-commerce chains. This disintermediation helped the Company improve its lead time and availability and also resulted in saving of margins. The Company has transitioned over last few years towards increasing the share of organized trade with channel specific offerings to build more relevance with new age consumers.

• As the Company continues to grow in scale and launch new products and extentions, it is imperative to make these products available across channels to reach to the consumers who are looking for such offerings through a right mix of distribution reach. The overall availability of Zydus Wellness products crossed 2.8 millions stores with almost equal split between urban and rural distribution.

FINANCIAL REVIEW

Consolidated financial highlights

Parameters FY 2023-24 FY 2022-23 Growth (%)
Net Sales 23,152 22,426 3.2%
Total Income from Operations 23,278 22,548 3.2%
EBITDA 3,082 3,372 -8.6%
EBITDA Margin (%) 13.2% 15.0%
Profit Before Tax (before exceptional items) 2,743 3,010 -8.9%
PBT Margin (%) 11.8% 13.3%
Net Profit 2,669 3,104 -14.0%
Net Profit Margin (%) 11.5% 13.8%
Adjusted Net Profit* 2,811 3,205 -12.3%

Profits and Margins

The EBITDA (Earnings before Interest, Depreciation, Taxation and Amortization) de-grew by 8.6% to Rs 3,082 millions from Rs 3,372 millions, last year. The Company registered 13.2% EBITDA margin. With calibrated price increases taken across portfolio and efficient hedging of key inputs the Company was able to consolidate the gross margin for the financial year and reported Gross margin at 50.8% of net sales basis for the financial year 2024, which is an increase of 193 basis points on a Y-O-Y basis. The Company ploughed back some of the gross margin expansion into brand building during the year, as a result of which advertisement expenses grew by 15.5% for the year. The reported net profit stood at Rs 2,669 millions.

Net Worth and Capital Employed

The total net worth as on March 31, 2024 was Rs 53,575 millions, higher by 4.6% from the previous year. The return on equity (ROE = Reported Net profit / Equity) stood at 5.0% during the year. Return on Capital Employed (ROCE = Adjusted earnings before interest net of tax / CE) stood at 5.4% during the year.

Net Debt

The consolidated net debt of the Company as on March 31, 2024 was at Rs 76 millions, against Rs 1,844 millions last year. Net debt-equity ratio improved at 0.001 as on March 31, 2024 as against 0.04 as on March 31, 2023.

Capital Expenditure

The Company has incurred capital expenditure of Rs 349 millions in Financial year 2023-24.

Other Key Ratio

The Companys current ratio (considering current / short term debt, and excl. non-current assets) as on March 31, 2024 stood at 1.58 against 1.31 last year. Debtors turnover ratio (in days) as on March 31, 2024 stood at 44.4 days as against 33.6 days last year, due to higher sales towards end of the year. Trade payables turnover ratio (in days) as on March 31, 2024 stood at 56.9 days as against 50.7 days last year. Inventory turnover ratio (in days) as on March 31, 2024 stood at 73.1 days as against 74.1 days last year.

STAKEHOLDER ENGAGEMENT

At Zydus Wellness Limited, the Company actively manages a range of key stakeholder relationships and strive to ensure open, honest, and constructive communication to ensure development of the business following robust engagement process for internal and external stakeholders.

The stakeholder network includes

A. Employees

Employees are the key stakeholders who drive the business objectives as a cohesive unit, thereby, making it imperative for the Company to address their needs, challenges, and aspirations. The following initiatives are undertaken in this regard –

1. Employee Engagement:

Employee-Friendly Workplace:

Our organizational culture values collaboration, innovation, and employee empowerment.

Physically and Mentally Safe Workplace:

We foster a physically and mentally safe workplace through robust policies such as Prevention of Sexual Harassment of Women at Workplace (POSH).

Performance Recognition:

We maintain a fair performance recognition system through our performance management system. Grounded on the pillars of meritocracy, collaboration, and execution excellence.

Feedback Mechanisms:

Weve established regular feedback mechanisms such as "Chai pe Charcha" for field sales employees and "Expresso with the CEO" for mid-level managers, facilitating one-on-one discussions to gather insights and address concerns.

Employee Recognition and Celebration:

We create opportunities to celebrate achievements and milestones through formal recognition programmes, annual off sites, Sales conference, team-building activities, and monthly birthday celebrations.

Employee Wellness:

Weve launched a Health and Wellness Policy and offered free health check-ups for employees at headquarters, with plans to extend this benefit to field employees, emphasizing a holistic approach to employee wellbeing.

2. Professional Development:

• We invest in our employees growth and development to help them reach their full potential. Our initiatives include:

Talent Management:

We conduct talent reviews, identify top talent, and implement succession planning for critical roles, ensuring a pipeline of skilled professionals ready to lead.

Training and Development Programme:

Our comprehensive training programme equip employees with the skills and knowledge necessary to excel in their roles. We provide skill-based technical training programmes across our plants and curate need-based interventions.

Leadership Development:

We nurture strong leaders through tailored leadership development programmes, incorporating tools like the Hogan 360 assessment to identify strengths and areas for improvement. Our aim is to empower leaders at all levels to inspire and motivate teams while upholding our organizational values.

3. Rewards:

• We believe in recognizing and celebrating the contributions of our employees. As a streamlined recognition structure we have enhanced our recognition and rewards structure, featuring initiatives like quarterly individual and team awards and SPOT awards to celebrate achievements.

• These initiatives have contributed to Zydus Wellness being recognized as a Great Place to Work for the second consecutive financial year, affirming our commitment to creating a workplace where employees feel valued, supported, and empowered to thrive.

B. Shareholders & Investors –

The Company values shareholders and investors who place their trust in and therefore, believe in effective and transparent communication through the following -

• Quarterly investor conference calls with analysts / institutional investors.

• Hosting Investor presentations and publishing earnings call transcripts and audio recording of the call on the website of the Company and the stock exchanges.

• Conducting Annual General meetings & publishing Annual Report on the website of the Company and the stock exchanges.

• Publication of Press releases on website of the Company and the stock exchanges.

• Publication of financial results / statements (unaudited / audited) on a quarterly / half-yearly / yearly basis on the website of the Company, the stock exchanges, and in the newspaper.

• Separate section of investors on the website of the Company in line with regulatory requirements.

• Addressing investor grievances by Stakeholders / Investors Relationship Committee comprising Independent and Non-Executive Directors.

• Practicing robust corporate governance.

C.Consumers –

The heart of business lies in making the consumer a priority and adapting to their evolving requirements through -

• Continuous engagement to gauge needs and address them with suitable product & pack solutions.

• Undertaking critical business decisions basis prior validation from consumers. The Company places considerable emphasis on the impact of those decisions.

• Enabling better choices by imparting information to consumers through several media channels and social campaigns.

• Delivering superior experience by offering best-in-class products and engaging in consistent improvements with the use of latest science.

• Driving value by consistently challenging cost structures.

• Providing prompt feedback to consumer queries and grievances.

• Enabling free trial of new products through different online & offline platforms.

D. Government & Regulatory Authority –

The Company supports the government and regulatory authorities by -

• Working with them through industry associations for policy advocacy.

• Supporting initiatives of the government for community welfare and development.

• Participating in seminars, meetings and conferences organized by the government and industry associations.

E. Suppliers & Vendors –

The Company supports the suppliers and vendors by -

• Organizing dairy camps with farmers.

• Educating them and distributing mineral mixture and deworming tablets for better health of animals.

• Continuous connect (virtual and physical) with critical suppliers to ensure supplies in VUCA (volatile, uncertain, complex, ambiguous) world.

• Fair contracts and joint processes to improve quality.

• Conducting strategic meetings between suppliers and management at regular intervals.

• Periodic communication on quality and service levels.

F. Planet & Society –

The Company contributes to the planet and society at large by –

• Ensuring compliance of all rules & regulations.

• Developing responsible products.

• Engaging in policy advocacy.

• Participating in environment improvement initiatives and sustainability (energy, water, waste reduction) improvement initiatives.

• Participating in working groups, events, conferences and community development activities.

RISKS

Risk identification, Risk mitigation, and Internal controls –

The Companys business comprises manufacturing and marketing of consumer wellness products. Its presence in these segments exposes it to various risks which are explained below.

Risk of fluctuations in prices of key inputs –

• Prices of key ingredients used in the products manufactured and marketed remain volatile due to several market-related factors, including changes in government policies, inflationary environment, and fluctuations in the foreign exchange, resulting in price fluctuations of products. The Company keeps a close watch on the prices and enter into long term contracts, wherever feasible, to minimize the risk of fluctuations in the input prices. The Company has also adequate inventory buffers as a risk mitigation measure and there is a continuous effort to increase supplier base in case risk is perceived.

Risk of competition and price pressure –

• Though most of the Companys products enjoy leading positions in their respective categories, the risk of competition from existing players as well as from new entrants remains high. However, the Companys strength in the marketplace, coupled with its continuous thrust on improving the quality of its products and offering newer products in the wellness segment provide it with an edge over competition. The Company supplies its products in both retail as well as institutional segments. Both segments have their own nuances in terms of customer expectations, competition, and pricing. However, the Company is well focused on increasing its share in all segments through a sound marketing strategy and a balanced approach.

Risk of evolving customer tastes, preferences, and behavior –

• The Covid-19 pandemic has resulted in notable changes in consumer habits and demands which require continued innovation to remain relevant and competitive. While the focus remains on accelerating the growth of core brands through innovation, the Company may lose market share and competitive advantage owing to shifts in consumer behavior.

Risk of litigation related to quality of products, intellectual properties, and other litigation –

• Being in the consumer healthcare and wellness segment, the Companys products and their manufacturing and supply chain processes are required to maintain high quality standards. Any deviation from prescribed regulations or any variation in quality from standards laid down by regulatory authorities can lead to actions from these authorities or litigation from its customers.

The Company has implemented various policies such as quality risk management, food safety management systems and regulatory controls. Different SOPs such as global food safety management, compliance standards for manufacturing facilities and self-inspection are also implemented. Dedicated team has been deployed to continuously keep a watch on recent changes in regulatory requirements and evaluate their likely impact on the Company to enable proactive measures to mitigate any possible risks of regulatory actions. The Company has procured adequate insurance against the risk of products being recalled from the markets due to quality issues. The Company also faces the risk of litigation from its competitors or customers on claims it makes for values its products offer. The Company always strives to ensure the highest standard of quality for its products and processes, and continuously works on improving upon that quality. It also maintains a high level of accuracy in product claims. Having a strong brand equity in each of the segments, the Company faces the risk of unauthorized and illegitimate use of its brand name, packaging designs and other intellectual properties related to its products. The Company ensures protection of its intellectual properties through appropriate registrations and other legal means. Currently there is an ongoing Trade mark dispute of the brand Sugarlite which the Company is contesting in the court of law.

Macro Economic and geopolitical risks –

• Geopolitical and macro-economic issues like political instability, military conflicts between countries, terrorist threats, significant currency devaluation and inflation in a country, geographical events that can have regional or global impacts poses a substantial risk for the Company who is globally dependent for its business. On the trade side, increased restrictions due to tensions between countries can disrupt trade flows and cause supply chain problems even in third-party countries. Restrictions can also affect commodity prices and lead to shortages of key resources such as oil and gas, affecting industrial production worldwide. The Company is very cognizant of the current on-going issues which might impact the business as usual. In light of the same the Company is focused on portfolio diversification to reduce single product dependency in some of its international business market, localization of manufacturing of its products to reduce forex and currency dependence of a particular country and expanding into new and stable geographies for its product portfolio.

Under Penetration of Category –

• The Company is continuously investing in the development of its brands and the category it operates in. Some of the categories in which the Company operates are under penetrated currently which poses one of the risks for the aspiration and growth strategy of the Company. The Company constantly innovates to meet the expectation of all its customers and therefore offers unique product propositions which would help to grow the brands and their respective categories.

Impact on business due to risk of shift or delay in seasons –

• The delay or shift in seasons may impact business of some of the brands like Glucon-D and Nycil which are largely dependent on onset of a good summer season in India. This risk can be mitigated by having flexibility in its supply chain to manage the inventory.

Counterfeit Products –

• The production of counterfeit products poses significant threat to the Companys credibility resulting in loss of sales and customer trust in the brand. The risk is mitigated by taking timely legal action against the fraudulent practices to safeguard its interests.

Supply chain disruptions –

• Covid-19 and geopolitical uncertainty around the world has put the resilience and continuity of the Companys supply chain at risk. The supply chain network is exposed to potentially adverse events such as physical disruptions, environmental and industrial accidents, labor unrest, trade restrictions or disruptions at a key supplier, which could hamper the Companys efficiency and delivery. These risks may be mitigated by adaptive distributed manufacturing footprint, following harmonious labor practices, ensuring sufficient inventory at all times and having more than one source of critical supplies.

Cyber Security –

• The cyber-attack threat of unauthorized access and misuse of sensitive information poses a great threat to business with the increase in digitalization efforts and the hybrid model of working. This makes the Companys business operations vulnerable and may inhibit performance. The Company has implemented and installed necessary security tools to safeguard against cyber-attacks.

Risk management and Internal Control Systems –

• The Company has established a well-defined process of risk management, wherein the identification, analysis, and assessment of the various risks, measuring the probable impact of such risks, formulation of risk mitigation strategy and implementation of the same takes place in a structured manner. Though the various risks associated with the business cannot be eliminated completely, all efforts are made to minimize the impact of such risks on the operations of the Company. Necessary internal control systems are also put in place by the Company on various activities across the board to ensure that business operations are directed towards attaining the stated organizational objectives with optimum utilization of resources. Apart from these internal control procedures, a well-defined and established system of internal audit is in operation to independently review and strengthen these control measures, which is carried out by a reputed firm of chartered accountants. The audit committee of the Company regularly reviews the reports of the internal auditors and recommends actions for further improvement of operations in general and financial controls.

Human resources –

• Apart from traditional responsibilities of the HR department, such as ensuring equitable benefits and compensation, overseeing employee engagement and retention, enhancing diversity, handling workplace issues, the Company has remained very committed to safety of all its employees and partners, and adopted the hybrid model of working to ensure wellbeing of its workforce. All necessary precautions and safety measures were implemented across all its locations.

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