Stock Pick From The Personal Care Sector

HERE IS WHY:

• Zydus Wellness is a debt-free company
• It is a leader in the sugar substitute and skincare market
• The company is set to report revenues worth Rs 500 crore in FY14

We have all heard of the old but eternal saying - Prevention is better than cure. We are fast moving towards a lifestyle that increasingly gives rise to illnesses termed as lifestyle diseases. This demographic change is the main factor driving the sales of products that have a lifestyle appeal such as low fats/carbohydrates, stress relief etc. This trend has helped Zydus Wellness achieve decent sales and net profit and is thus chosen as the choice scrip for this issue. It has also been consistently paying dividends to its shareholders. With the unpredictable nature of the markets, it is advisable to ensure the safety of the capital and generate good returns.

Zydus Wellness, a subsidiary of Cadila Healthcare, has three blockbuster brands under it - Sugar Free (low calorie sweetener), EverYuth (skincare) and Nutralite (table margarine). These three brands have been a part of Zydus Wellness' success story over the years. These over-the-counter (OTC) brands are well placed and cater to three distinct consumer needs. This gives the company very high visibility among different sets of consumers, thus increasing it brand recall value. Encouraged by this success, the company also launched a fourth brand called ActiLife a few years ago and is slowly gaining ground in the market.

Currently, Sugar Free remains the top brand of the company with 92 per cent market share in the sugar substitute market. It has almost become a generic for low calorie sweeter. Under EverYuth, the company has two different offerings, namely EverYuth Peel-Off and EverYuth Scrub. The company is a leader in both these segments. Its third product, Nutralite, is the largest brand in the margarine category in India. The company has now come up with the premium versions of both EverYuth and Nutralite, which are likely to do well considering the reputation that its brands have in the market.

Shareholding Pattern As On  31/03/2013
Promoter and Promoter Group	72.54
FII	4.06
DII	11.76
Bodies Corporate	2.8
Public	8.84
GRAND TOTAL	100

The company’s financial performance has also been fantastic over a number of years. In the last four years, its EBITDA margins have remained above 25 per cent withstanding all kinds of volatility. The topline has grown at a five-year CAGR of 46 per cent to Rs 409 crore in FY13. The net profit has also grown multi-fold from Rs 4 crore in FY08 to Rs 99 crore in FY13. Its balance sheet remains very healthy, devoid of any debt and cash pile of Rs 190 crore as of March 31, 2013. 

Further, the company has set an ambitious growth target of 22 per cent in revenues to Rs 500 crore for FY14. It has guided a tax rate of 10-11 per cent and about 25 per cent EBITDA margins for the same period. The margins should sustain as it has increased the prices of some of its products. Zydus Wellness is also mulling the acquisition of some brands in the nutraceutical category in the future. This would lead to an increase in its revenues going ahead. 

On the valuation front, at the CMP of Rs 673, the stock is trading at the adjusted price to earnings multiple of 31x. The market is giving a higher valuation due to its consistent performance and sustainability of the business. We expect the company to report adjusted earnings per share of Rs 26 next year, giving a target price of Rs 806. This implies an upside of 16 per cent in the next one year.

LAST FIVE QUARTERS (Rs/CR)
	Mar '13	Dec '12	Sep '12	June '12	Mar '12
Total Income	103.39	95.94	91.55	94.56	80.9
Other Income	4.28	4.05	3.99	3.47	2.94
Profit Before Tax	33.07	29.48	27.48	17.83	26.52
Tax	(5.01)	6.43	3.39	4.11	2.63
Net Profit	37.41	22.59	23.62	13.49	23.49
Equity Share Capital	39.07	39.07	39.07	39.07	39.07