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| Summary of Contents STOCK UPDATE Zydus Wellness
Recommendation: Reduce
Price target: Rs520
Current market price: Rs598 Heightened competition in skincare segment to affect Everyuth sales Key points - Multinational Johnson & Johnson India (J&J) has decided to become aggressive in the domestic skincare market after the discontinuance of the sales of some of its baby care products (following an FDI order) in the domestic market. J&J has a presence in the domestic skin care segment through its brand Clean & Clear. It is the fourth largest player in the domestic face wash category (HUL is no.1 with more than 30% market share, Zydus Wellness has less than 5% market share).
- J&J might launch some of the products from its international portfolio in the face wash, scrub and skin cleansing categories, which are currently at a nascent stage in India but have a strong potential to grow in strong double digits in the medium to long term.
- J&J's move to become aggressive in the domestic skin care market would heighten the competition for smaller players like Zydus Wellness, which is bearing the brunt of a limited portfolio in the domestic market. Zydus Wellness' Everyuth brand is the market leader in the domestic peel-off (over a 90% market share) and scrub categories. If J&J and other multinationals become aggressive in the scrub category it would put significant pressure on Zydus Wellness' market share in the coming years.
- Zydus Wellness' revenues have stood flat or marginally declined in the past three to four quarters as increased competition and cut in spending in the discretionary categories have affected the sales of its Everyuth brand while Nutralite (its margarine brand) continues get a lower preference amongst the domestic consumers. Also, the margins of its skincare portfolio have come under pressure due to increased competition from HUL and other players.
- Though the company is banking big on its new "Go to market" distribution strategy, but its limited product portfolio and inability to add successive products and variants make it difficult for it to compete with the large players. Hence, we believe growth uncertainties would remain in the near term unless Zydus Wellness gets aggressive (ie launches new products or enters new categories). We maintain our Reduce rating on the stock with an unchanged price target of Rs520. The stock is currently trading at 24.1x its FY2015E EPS of Rs24.8 and 20.8x its FY2016E EPS of Rs28.7.
- Key risk to our rating: Any significant improvement in the revenue growth and profitability in the coming quarters.
VIEWPOINT Marico Kaya Enterprise
Current market price: Rs488
View: Positive Cash-rich company in a fast growing niche segment Key points - Leading player in the fast growing attractive skin care segment: Marico Kaya Enterprise Ltd (MaKE) is a leading player in the fast growing skin care segment in India and the Middle-East. The company has a strong presence in the Indian market with its 86 Kaya Skin clinics spread over 26 cities. It is also present in three Middle-Eastern countries with 18 clinics under its namesake brand, Kaya. The skin care category is growing at over 25% in India as well as in the Middle-East and MaKE with its strong brand equity and dominant presence is well placed to capitalise on this opportunity.
- High leveraged business enables disproportionate returns during upturn: The nature of the business requires the company to hire dermatologists and skin specialists; it has a rich pool of over 140 dermatologists spread across India. The cost of this high quality and trained personnel is largely fixed in nature and whenever the revenues improve (due to an improvement in the same-store sales) the company would gain employee leverage leading to higher margins. Currently, the employee cost constitutes 34-35% of the total turnover and going forward we expect the cost to come down to 20-25%, thereby providing huge operating leverage to the company. Thus, the OPM is expected to double from the current levels of 5-6% to 10-12% in good times.
- Entered into asset-light Kaya Skin Bar segment to boost volumes: In order to improve the sales of its products (the company earns revenues through its range of services as well as products), which currently form 15-20% of the portfolio, and increase the contribution to 30-35% in the next three years, MaKE has entered into an asset-light model called Kaya Skin Bar. Under this format the area ranges from 100sq ft to 250sq ft in high-footfall locations like malls, high streets etc, with only one sales personnel. Thus, this model would boost its revenues and thereby expand the margins and returns. Currently, the company has three Kaya Skin Bars and going forward it aims to add another ten to twelve Kaya Skin Bars in a year's time.
- Strong Q1 results spell turn-around; expect strong earnings growth ahead: For Q1FY2015, the company reported a strong revenue performance, with a top line growth of 17% YoY. Both the Indian and the international business reported a robust double-digit same-store sales growth of 10% and 16% YoY respectively. On a consolidated basis, the company posted an operating profit of Rs4.2 crore compared with a loss posted in the same quarter of the last year. We expect the same-store sales growth momentum to pick up which is likely to have a positive impact on the margins and earnings ahead.
- Well capitalised business; with zero debt and cash surplus, we have a positive view: Despite operating in a capital intensive business, the company is debt-free and is sitting on surplus cash of close to Rs175 crore (close to 30% of its market cap). Along with this the business runs on negative working capital of 60 days (MaKE collects cash in advance from customers for the services to be rendered in future) which provides comfort on the cash generation ability of the business. As per our rough estimates, the stock is available at 12-13x FY2016 estimates of Rs27-28 per share. Consequently, we believe the stock could potentially provide 18-20% returns from here and should be accumulated on every decline.
| | | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. | |
| Regards,
The Sharekhan Research Team |
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