Investor's Eye
[August 16, 2013] | | |
| Summary of Contents
STOCK UPDATE Zydus Wellness
Recommendation: Buy
Price target: Rs633
Current market price: Rs551 Price target revised to Rs633 Result highlights -
In Q1FY2014 revenue growth moderated; MAT credit boosted bottom line: Zydus Wellness' net sales grew by 11.5% year on year (YoY) to Rs115.0 crore in Q1FY2014 (the revenue growth moderated from 20%+ levels in Q3FY2013 and Q4FY2013). The growth was driven by a strong performance of the Sugarfree brand, which we believe must have grown by over 25% YoY during the quarter. Sales of Nutralite remained flat YoY while Everyuth sales slowed down due to an overall slowdown in the category. Everyuth is bearing the brunt of the slowdown in the domestic consumer's discretionary spending due to sustained inflationary pressures and persistent macro-economic concerns. The benign prices of inputs (especially palm oil) and better revenue mix aided the gross profit margin (GPM) to improve by 117 basis points YoY to 70.5%. However, higher employee cost and other expenses resulted in a flat operating profit margin (OPM) of 16.0%. The operating profit increased by 11.1% YoY to Rs17.2 crore during the quarter. The tax expense for the quarter is net off minimum alternate tax (MAT) credit of Rs2.4 crore. This led to a 68% year-on-year (Y-o-Y) growth in the profit after tax (PAT) to Rs23.1 crore. -
Earnings revision: We have revised downwards our earnings estimates for FY2014 and FY2015 by about 5% and 7.5% respectively to factor in the lower than anticipated growth in the revenues during the quarter. We believe this is a short-term phenomenon and the growth in some of the key discretionary categories (including face wash) will revive over the next three to four quarters. -
Price target revised downwards to Rs633, Buy retained: Zydus Wellness is focusing on enhancing its distribution reach and introducing new products in its portfolio which should help it achieve revenue growth in mid teens over the next two to three years. Also, with the tax rate likely to remain in the 8-9% range, we believe Zydus Wellness' bottom line will grow at a compounded annual growth rate (CAGR) of 15% over the next two years. In line with the reduction in the earnings estimates, we have reduced our price target for the stock to Rs633 (valuing the stock at 19x its FY2015E earnings). At the current market price the stock is trading at 19.8x FY2014E earnings per share (EPS) of Rs27.8 and 16.5x its FY2015E EPS of Rs33.3. We maintain our Buy recommendation on the stock in view of the company's strong balance sheet (which has a huge pile of cash and cash equivalent) and expectation of a decent upside from the current level.
VIEWPOINT JB Chemicals & Pharmaceuticals Growing without a spark We have interacted with the senior management of JB Chemicals & Pharmaceuticals (JB Chemicals) on the sidelines of the annual general meeting (AGM) held on August 14 in Mumbai. While most of shareholders present during the meeting seemed satisfied with the annual performance of the company and Rs3 per share dividend (face value Rs2), the management chose not to immediately respond to the few questions raised by the shareholders. However, we were able to reach Pranabh Mody (President and Whole-time Director, Operations) and he frankly answered most of our questions. He talked about the company's performance, growth strategies and future plans of actions. View: In this scenario, the possibility of cash burning out is remote; at the same time, we do not find a big trigger that could prompt a rerating of the stock. It may be noted that the company's disposable cash balance of Rs586 crore is 84% of the current market capitalisation of the company at Rs692 crore and only 16% of the market capitalisation represents business operations of the company. At the current market price of Rs82, the stock is trading at 8x estimated earnings per share (EPS) for FY2014E.
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Regards,
The Sharekhan Research Team | |
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