Zydus Wellness Limited (531335) Earnings Call Transcript & Summary

Good afternoon, and welcome to the post-results teleconference of Zydus Wellness Limited for Quarter 2 Financial Year 2021. We have with us Dr. Sharvil Patel, Chairman; Mr. Ganesh Nayak, Director; Mr. Umesh Parikh, CFO; and Mr. Vishal Gor, Senior Vice President, Corporate Finance at Cadila Healthcare Limited. As the country is fighting the pandemic and our economy is gradually opening up with the necessary safety measures, the quarter by -- the quarter gone by witnessed a revival in growth rate of our business as well, as a result of which we recorded a growth of 9.3 percentage at gross sales level for the quarter and 4.9% at total revenue from operations. The reason for lower growth at total revenue from operations level during the quarter is due to lower than -- is due to lower operating income in the form of GST budgetary support as the same is discontinued for our Sitarganj plant from January 2020 onwards and aggressive cut in trade spends last year. Health and wellness portfolio of our major brands have become even more relevant during the COVID times. Following are some of the highlights of the growth trajectory of our brands during the quarter gone by. Sugar Free along with Sugarlite saw a very good traction aided by increase in home consumption. Glucon-D and Nycil continued to do well during the offseason. Everyuth and Nutralite saw a revival month after month. While Everyuth has already touched the pre-COVID level, Nutralite is expected to touch the same in a short period of time. Dairy-led product like Sampriti Ghee registered a remarkable growth over the last year. From the channel perspective, growth was mainly driven by general trade and e-commerce, while modern trade reported degrowth for the portfolio. E-commerce grew across the portfolio at 130% plus, mainly on brands, Sugar Free and Complan, and all others as well, while general trade grew at around 10%. International business doubled itself and contributed to 5% of the revenue for the quarter. As a part of a strategic initiative to pay down the debt, the company has bought back its own nonconvertible debentures of INR 11,050 million, which will help the company reduce the debt burden and deleverage the balance sheet. In the process of buying back its own nonconvertible debentures, the company has paid onetime debenture redemption premium of INR 980 million, which is recorded as exceptional item in our financials for the quarter. During the quarter, the company has successfully completed preferential issue and QIP issue of equity shares by raising INR 3,499 million and INR 6,500 million, respectively, from the above issuance, the proceeds of which will be used towards redemption of nonconvertible debentures. The completion of buyback of nonconvertible debentures will have a positive impact on the earning per share of the company over a period of time. Let me take you through the highlights of consolidated financial performance of quarter 2 FY 2021. During the second quarter of FY 2021, our total income was -- from operations stood at INR 3,420 million, up by 4.9%. EBITDA was down by 10.9% year-on-year to INR 271 million. However, the same was up by 11% before the GST budgetary support that ceased for Sitarganj plant from January 2020 onwards. PBT before the exceptional items was down by 63.1% year-on-year to negative INR 74 million. However, the same was up by 27% before GST budgetary support that ceased for Sitarganj plant from January 2020 onwards. Net profit stood at negative INR 1,053 million. With that, let me share some of the highlights of the operations for the quarter gone by. We continued our thrust on marketing initiatives to grow the categories and increase market share of our brands during the quarter. To narrate a few, on the Glucon-D front, during the quarter, Glucon-D ImmunoVolt was launched to tap the heightened need of immunity products for kids. The product is loaded with vitamin C, vitamin D and zinc to boost immunity. The launch was supported with TV and digital media initiatives. The core business continue to get impacted with COVID lockdowns and adverse weather conditions. On the Complan front, during the quarter gone by, we continued to invest behind the brand through consumer offers and communication. To participate in the sachet market targeted towards North and East, we also launched Complan 75 grams sachet at INR 30 price points. On the sweeteners front, during the quarter gone by, Sugar Free has continued to grow strongly, backed by consistent investment in mainline and digital media, to drive relevance for sugar substitutes. To capitalize the growing consumer preference for shopping on e-commerce, the brand has significantly increased its investments on this channel, and this has helped brand grow at more than 100% versus last year for the same quarter on this channel. Sugarlite witnessed very good traction despite COVID-19 and related lockdowns. The growth was supported with specific media and other activations. On the Nycil front, the brand witnessed a very good traction supported with media campaign during the quarter. On the Everyuth front, during the quarter gone by, the brand witnessed a revival month after month, backed by investments in advertising with a TV campaign for flagship face scrub portfolio to boost offtakes. Everyuth also introduced a new product, Everyuth Aloe Vera & Cucumber gel, in the face moisturizers segment with an aggressive on-ground push. On the Nutralite front, relaxation in COVID lockdowns has seen the renewed demand month after month during the quarter gone by. We have also launched new Nutralite Choco Spread on e-commerce and modern trade platforms. Nutralite Choco Spread is available in 2 healthy variants, Crunchy Quinoa and Calcium Enriched. The launch was supported with visibility on both the channels. Going forward, we have rolled out Project Vistaar, which will expand our direct distribution by 1.5 lakh outlets to 5 lakh outlets by the end of financial year 2021. We are poised for a strong growth of our business, led by good volume growth. With the upcoming festive season, we also see recovery in demand in discretionary spends brands like Everyuth. We also see a surge in demand for Nutralite as more and more food services joints open up. Thank you, and we will now start the Q&A session. Over to the coordinator for the Q&A.

[Operator Instructions] We take the first question from the line of Abneesh Roy from Edelweiss Securities.

My first question is on Complan. So this 75 gram INR 30 SKU, how deep will be the penetration? And how is the current percentage LUP contribution to Complan? Some sense you can give.

So it's early days. We have just launched this SKU. So it's a small contribution to the overall business right now. It will be less than 5%. About 2% to 3% I mean. It's early days.

And 1 follow-on on this. So market leader had some manufacturing issues because of COVID, and they have also taken one of their brands, BOOST, pan India. So did you benefit in Q2 because of some shortage of the market leader? And do you see some higher competitive intensity because of BOOST being taken maximum?

So we've seen at an overall level while brand has been flattish, the -- largely the growths are coming -- good growths are coming, mid singles, from general trade and e-commerce has seen a substantial growth. Modern trade as a channel has been under pressure. So that's been pulling up the brand. From a competition intensity, I think nothing significant. I'm sure while it may have impacted the competitor's primary sales, but there is product available in the market. So competitor -- competition intensity continues the way it has been. We are focused on our actions in driving business growth, which is largely right now 2 channels supporting us in that direction, general trade and e-commerce.

And my last question is e-commerce. If you could give us some sense on what was it in terms of different portfolios as a percentage of sales last year? And how is it this year? And do you see that sustain?

So e-commerce is something which for the quarter gone by was about 4.5% of our sales and it is at an overall portfolio level more than 130%. Brand like Complan has seen a substantial gain from that, more than the overall business levels, closer to 200%. And that's really helping us pull the brand forward and overcome whatever losses we have had in modern trade.

The next question is from the line of Jainis Chheda from Dimensional Securities.

Yes. Actually, I wanted to understand that how much would be the sales segment wise for each product, if possible? And has there been a negative impact in the margins?

So overall, we don't share brand-wise numbers. So we've given directional numbers. The overall...

And any specific reason for it? Yes, sorry.

Yes. Umesh, will you want to pick up the margin? So -- okay. Let me handle it. From a business perspective, our like-for-like without the one-times and the GST budgetary support, we have seen a positive 11% improvement in EBITDA and about 27% at PBT level. The factors influencing the EBITDA on a margin level is -- one is the fact that there is the GST budgetary support, which has been -- which was there till last year, which is no more. And therefore, while we are improving the margins and we'll overcome that, but it is -- it takes some time for us to overcome that. So that's one fundamental factor at operating level where the margin is impacted. The other factors being -- in our profit being the onetime expense of INR 98 crores on account of...

Sir, I'm not looking at the onetime. I'm looking till EBITDA level.

At EBITDA level...

Yes. Go ahead, please. You were saying something?

I was asking was -- yes.

EBITDA level...

Tarun, you can answer or, Umesh, you can answer at the EBITDA level because of GST?

Yes. So at EBITDA level, the GC level and EBITDA level both, the effect is of discontinuation of GST budgetary supported Sitarganj, which ceased to exist from January 2020 onwards. And then this INR 7 crore of impact in the margin because of that.

Otherwise, it will be positive 11%.

Yes.

The next question is from the line of Lohit (sic) [ Rohit ] Harlikar from Elara Capital. As there's no response, we take the next question from the line of Achal Ostwal from Sharekhan. As there's no response, we take the next question from the line of Vismaya Agarwal from ICICI Securities.

Just wanted to get a sense of how big Sugarlite has become and your outlook on the particular brand.

Sugarlite should be close to about -- this year about 5% of Sugar Free in terms of revenues. It's still early days. This year, it's largely on track on our milestones. It's still 1 more year before we can say that, yes, we have crossed that. Now it started -- at least first 6 months or 1 year were a little harder. But this year, it's been on track. It's showing good momentum. If it stays on track, we are hoping to make it a sizable brand over the near future.

The next question is from the line of Tejash Shah from Spark Capital.

First on adjustments. Sir, if you can actually give the number on Sitarganj's gross budgetary support in 1Q last year, 2Q and 3Q because I believe that will be again impacting our numbers in coming quarter as well.

Yes. So Sitarganj budgetary support was to the tune of INR 32 crore for the full year. So that will have an impact on the next quarter as well. As this quarter is impacted by INR 7 crore, next quarter also it will be impacting almost all the same INR 7 crore, INR 8 crore.

Okay. Sir, the same quantum would have impacted us on 1Q as well, right?

Yes.

Okay. Sir second, one more adjustment that we are seeing for last two, three quarters is that on employee cost. So for example, 1Q result are full year number of both -- base year FY '20 employee cost was INR 1,883 crore which in today’s number it is INR 1,560 crores and when our annual report came out it was INR 1,746 crores. And obviously at EBITDA level it gets adjusted whether versus other expenses but this adjustment pertains to what?

You are asking about the one-off in the other expenses?

No, sir employee cost -- when I see consolidated employee cost when we published our annual report it was INR 1,746 crores in FY '20, which moved to INR 1,883 crores in our 1Q results and now INR 1,560 crores in today numbers.

So, the employee cost, the increase is largely on account of the -- generally the inflation and increment even increase is just about 6%, 7% this quarter. Rest of the increase is on alignment of the [indiscernible] policies with the Zydus policies and we have mainly in leave encashment and gratuity to align the policies. So the -- because of the actual valuation, the cost is higher by about 4.5%.

I was referring to base statements in the base year. Anyways we'll take this offline.

Your voice is not clear. Yes. Still not able to hear you.

We take the next question from the line of Sanjay Manyal from ICICIdirect. Please go ahead.

I just want to understand if there is any impact of the commodity cost because ideally milk prices would have been down in the last 6 months. So what would have been impact of that? And if there is any adverse commodity movement?

There has been slightly adverse impact on the milk price because in the Complan though prices have been down, we have been getting the benefit in the ghee manufacturing. The issue is with the Complan where we consume the SMP, which was manufactured a few months before. But now onwards, coming quarter, you'll see the reflection of the goodwill prices in the Complan as well.

So it's a weighted average...

If I can take that question. I think you will see a good improvement because of milk pricing on the margins for Complan. And the only material, which is the palm oil, which has obviously gone up recently, has only a little bit of negative impact. Otherwise, most of the commodities are on the positive side.

Okay. Okay. And if you can really specify on the taxation part, the income tax part. Till what time will be at the zero tax? And what exactly is the nature of this taxation provision?

Sure. So we have answered this in earlier forums as well. The zero tax is mainly on account of the goodwill depreciation, which we charge in the income tax books of account as well as the accounts -- accounting books of accounts. This benefit will continue until the next 4 to 5 years.

The next question is from the line of Jignesh Makwana from Asian Markets.

Yes. I just want to know, I guess, on the gross margin front, what is the compatible gross margin for this particular quarter?

Yes. Comparable gross margin on the net sales basis the previous quarter -- the same quarter last year, it was 55.5%. In this quarter, it is 53.4%. And the effect of 2% is mainly on account of GST budgetary support discontinuation that we explained in the call earlier.

But if I remember, sir, last -- in last con call you said that we are witnessing the demands of raw material prices and the gross margin should be improving. If I adjust the -- even the budgetary support also my gross margin is not improving actually. So, any particular reason or any adverse price/mix you are witnessing?

So mainly, as I told you, the milk prices have been benign, and the benefit will start coming in the next quarter. Until now, we have been using the SMP manufactured earlier, and that was impacting the Complan gross margin. Also, the RPO prices have also really shot up in the recent past, but that will impact the gross margin in the coming quarter. But other than these two, like we don't see any impact. Complan margin will definitely improve in the next quarter.

Sure. And one more bookkeeping question from my side. What is the net debt position as on date?

So as on that, as we speak, we have retired our earlier debt of INR 1,500 crore of NCD. We have extinguished all the NCDs. Currently, we are having a net debt of about INR 250 crores because -- about INR 150 crore. Yes.

And what is the reason behind our other financial liabilities in the current -- our current liability has shot up significantly. Is it because of the loans which we are going to repay over the next one year because of that particular reason?

So you are looking at current financial liability?

Other current financial liability that has shot up significantly.

No. That is -- NCD has been -- actually NCD has been extinguished, repurchased. And there is INR 395 crore of NCDs which is left, which will also be -- we have already extinguished in the month of October.

The next question is from the line of Sayantan Maji from Crédit Suisse. As there is no response, the take the next question from the line of Amit from SBI Mutual Fund. As there is no response, we take the next question from the line of Kaustubh Pawaskar from Sharekhan.

Yes. Sir, I just have one question or a clarification. Sir, you just mentioned in the call that your general trade grew by 10%, and there is a strong growth in e-commerce of around 130%, which contributes 5% of your revenues. So is there a substantial decrease in the modern trade, sir? And what is the contribution of the modern trade?

So modern trade has seen high double-digit degrowth in the last quarter. There is also a small element of CSD also, which has also pulled us down. So there are -- but CSD being relatively less impacted, I think modern trade is the bigger impact. Routine modern trade used to do anything between 13%, 14%. It has come down because of this high double-digit degrowth, which is largely linked to what is happening in the modern trade, both in one major account, plus generally modern trade is down. So these are the fundamentals.

Right. And now that you have started seeing recovery in some of the discretionary items like Everyuth, and Nutralite also might gear up the momentum, mainly because the food outlets have started opening. So should we expect Q3 the growth to be better than what it was in Q2? Also Nutralite is one of the larger contributor to the revenues. Earlier, it was one of the larger contributor to the Q3 revenues. So on that, should we expect Q3 to be better?

So momentum-wise, I expect a similar growth pattern to remain because even if you look at without -- at a gross sales level, we've got close to about 10%, which is a fair number. So we are hopeful that we will continue with the similar momentum of targeting a double-digit growth rate. Of course, there will be in our reporting impact of -- sorry?

Talk about Nutralite. They are saying -- sequentially, yes, it will do better sequentially on Nutralite going forward.

Yes. So sequentially, it will be better, but they will -- there may still be some distance to cover versus the last year. So we are hoping to touch last year's numbers by end of this calendar year. So there may be still some numbers, which may be behind that.

Yes. And one last, on the market share point. So any data point in terms of whether you've gained any market share in some of your categories like Glucon-D or for that matter Complan because since now you are in -- promoting your LUP, that is INR 75 pack. So in terms of market share, have you seen any kind of improvement?

So we are not very confident of the Nielsen data, and that's why we've not shared because it is unreliable. But if I were to quote any direction from that, I think Glucon-D and Complan are more or less in the same trajectory as they were. Nycil has been reported as a growth in market share by them.

Okay. Okay. And Sugar Free as a category have now crossed the pre COVID levels or in terms of growth or any direction on that bit?

So Sugar Free for both the quarters gone by has seen a good double-digit growth. It is now operating well above the pre COVID levels. That's one category which has seen consistent momentum, and we are hopeful that we can sustain that as we go forward.

The next question is from the line of Praveen Sahay from Edelweiss.

So the first question is related to, as you had communicated earlier, that your summer product you want to mix in a season neutral. And for that, in the month of -- the October month of second summer, you will go and do the sales and get some sales and generate some sales in that tenure. So how is the progress in that scenario, sir?

So we have seen improved growths. In fact, Nycil has had a good double-digit growths in the quarter gone by and right up to now. So we're seeing Nycil showing a better traction post the season also. Glucon-D was fairly affected by the season. So it's not even through the quarter, but we have seen some improvement in growth in the second season if September, October are referred to. Plus initiatives that we are taking in terms of having -- improving our presence on the brand beyond the June, which includes Glucon-D ImmunoVolt, which has contributed to the growth on the brand on Glucon-D. So overall, both have shown a positive movement. It's a bit of journey that we'll have to do, but we are taking initiatives. Our early response from the market is showing a positive direction.

So I think if I can add a few things to it -- this is Sharvil here. So one is, as you said, Nycil -- with the launch of the new variant, Nycil -- I mean that part of the strategy is working out. With Glucon-D also, with launching something to do with the cold season. Also, we hope we can create some traction for that brand, which is very summer oriented. Sugar Free is more consistent across in terms of the business. And so will be Nutralite with the additions of new business lines that we're adding in that space. So by and large, we are on track to make sure that we even out our sales trends from summer to more even it out. But it will be a process of at least 1 to 2 years.

Also, any color on specific to the Nycil and Glucon-D. Is there a geographical expansion also started paying out?

I think there's no substantial shift. Yes, we are expanding. ImmunoVolt is something which is going to markets which were relatively less important for Glucon-D earlier. So we are making efforts, but there is a -- these brands are 50, 60 years of legacy. So it will not happen overnight, but there is clearly an effort. So I cannot say with any substantiation.

We will have a big distribution which will go up. So we will have a better geographical direct reach.

Yes.

Yes, yes. And secondly, on the Complan, sir, also we as a company initiated that -- the pharmacy channel. So how is the response there, sir? And how is that -- especially because the Zydus is more on the Western part. So how is performance in that geography?

So pharmacy channel has responded well. In fact, pharmacy channel across our brands -- we dialed up much more as the lockdowns happened and it was a channel, which was very helpful. So Complan has responded well in the pharmacy channel. And even the extension of Nutrigro, early days, and therefore, we'll have to wait it out. But right now, the pharmacy channel is responding well, and we continue to believe there is potential to do better than that channel for Complan.

So, specific to the Nutrigro only, we are more focused on the pharmacy distribution?

Yes, that's -- because that's where we want to grow it first. That's where we believe that will be the best way for the brand to grow because the role of the health care professionals, the doctors, in particular, has a larger play in that segment. And that's why we are focused there. So it's just been 3, 4 months of launch. So early milestones we're more or less on track. We'll have to wait and watch before we can start taking it -- to give you more data beyond that.

I have 2 clarifications, sir, I want to make. One, as you had said that the income tax -- the benefit is of a goodwill amortization, and that will for 4 to 5 years. Is there an element of your plants as well which are situated in Northeast? And how long that will be?

So the benefit of goodwill amortization overrides the plant benefit that we have in the income tax act. At our Sikkim unit 1 and 2, we have a benefit of Section 80IE, but the goodwill depreciation will override that and we'll have a overriding impact because of that. We will not have a tax element, at least the next 4 to 5 years.

Okay. Okay. And the second is related to, as you had mentioned earlier -- that related to the net debt, and there is an NCD of some -- which you are going to pay in October. So the entire NCD will be get over by the second quarter? Is it like...

That's already done. That's already done. We have repurchased all the NCDs and extinguished them all.

So that's -- there is another -- some -- around INR 376 crore...

INR 395 crore.

Wrong number. INR 395 crore, yes. So that is also done?

Yes. That's done.

The next question is from the line of Vinay Shukla from PhillipCapital. As there is no response, we take the next question from the line of Shalini Gupta from Quantum Securities.

Yes. I wanted a few clarifications as you talked about GST support being withdrawn. Sir, if you could just please throw some more light on exactly what is this GST budgetary support and that has been withdrawn?

So government, actually, in area-based exemptions, which is more applicable to Sitarganj and Sikkim unit, government brand support in form of GST budgetary support. So whatever GST amount, which is payable every month and every quarter, we get certain percentage benefit of that from the government, and that is the GST budgetary support. So which was, therefore, up to 10 years and which just ceased to exist in last December 2019.

For the Sitarganj.