Zydus Wellness Limited (531335) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Zydus Wellness Limited post-results Q&A session with analysts and investors. [Operator Instructions] I now hand the conference over to Mr. Tarun Arora, CEO, Zydus Wellness Limited. Thank you, and over to you, sir.

Good afternoon, and welcome to the post-results teleconference of Zydus Wellness Limited for quarter 1 financial year 2021-'22. We have with us Dr. Sharvil Patel, Chairman; Mr. Ganesh Nayak, Director; Mr. Nitin Parekh, Group CFO; Mr. Umesh Parikh, Zydus Wellness CFO; Mr. Vishal Gor, Senior Vice President, Corporate Finance at Cadila Healthcare Limited. At the Onset of the first quarter of the financial year, 2021-'22, we witnessed a strong momentum getting built up with good traction for our summer season brands, Glucon-D and Nycil, during the first half of the month of April '21. But unfortunately, for the second consecutive year, our business and specifically our summer brands got impacted due to COVID-19 second wave followed by Cyclone Yaas and Tauktae and onset of early monsoon. Even though we were ready to deal with the crisis at operations and logistics level, the country saw lockdowns and restrictions across urban and rural geographies leading to weak consumer sentiments and demand disruptions. However, with receding impact of second wave and gradual opening up of markets, we see good traction on our brands followed by demand revival across channels. Despite COVID-induced setbacks, we posted total income from operations growth of 11.2% on a year-on-year basis. Continuing commodity inflation, in particular of refined palm oil has put pressure on our gross margin, which were down by 87 basis points as a percentage of net sales compared to previous year's comparable quarter. Going forward, we see some softening of refined palm oil prices in the second quarter. Let me take you through the highlights of the consolidated financial performance of quarter 1 financial year 2021-'22. During the first quarter of financial year 2021-'22, our total income from operations grew by 11.2% to INR 5,976 million. That includes onetime GST budgetary support of INR 52.2 million. EBITDA was up by 14.8% year-on-year to INR 1,404 million. PBT before exceptional items was up by 57.3% year-on-year to INR 1,308 million. Net profit was up by 46.6% year-on-year at INR 1,308 million. With that, let me share some of the highlights of 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, the quarter gone by started on a strong note for the brand. However, due to lockdowns starting from mid-April and adverse weather conditions in key states, the brand sales got impacted again during its peak summer time. Glucon-D ImmunoVolt continued to deliver steady business. On the Complan front, on the back of new communication of the brand promoting 2x faster growth proposition, which was aired on TV across all India, the brand delivered a good double-digit growth sales during the quarter. We also continued to invest behind the brand through customized consumer offers on select SKUs in top markets. On sweeteners front, the brand continued its good momentum for the quarter and delivered a decent growth over a huge base of last year comparable quarter. We continued with our investments on mainline media as well as on digital. We -- to drive the brand adoption of Sugar Free, a massive influencer program, #iamsugarfree was activated on Instagram and more than 100 influencers advocating the brand. On the Nycil front, the brand witnessed a degrowth during the quarter gone by as we missed the season sales induced by second wave lockdowns and curbs. We hope to see some recovery in the second quarter. Nycil Soothing Body Mist was launched in April 21 and was supported by TV and digital media campaigns while the launch got impacted due to second wave of COVID-19. On the Everyuth front, the brand continued to grow in strong double digits, though on a lower base of previous year comparable quarter with ATL campaigns on flagship scrub portfolio and digital inputs on the entire range. On the Nutralite front, the brand delivered strong growth, both in institutional and retail business during the quarter despite lockdown in key markets. Nutralite Mayo business also continued its strong performance. Nutralite Choco Spread, which is currently available in modern trade and e-commerce channel faced slowed down because of the closure of some of the modern trade outlets due to lockdown. As per the MAT June 21 report of Nielsen, Glucon-D has maintained its #1 position with a market share of 58.2% in the glucose powder category. Complan has a market share of 5.5% in the MFD category. Nycil has maintained its #1 position with a market share of 35.2% in the prickly heat powder category, which is an increase of 161 basis points over the same period last year. Everyuth scrub has maintained its #1 position with a market share of 36.9% in the facial scrub category, which is an increase of 289 basis points over the same period last year. Everyuth peel off has maintained its #1 position with a market share of 77.6% in the peel off category. Everyuth brand is -- has achieved a market share of 6.3% at the overall facial cleansing segment level. We have started on the next phase of transformation journey post-integration, which could also be referred as Transformation 2.0. We intend to become leaner and more efficient through business projects, including disintermediation and digitization of our processes across the value chain. We have initiated a number of projects from sales, supply chain to people function that could help us become more agile riding on the digital wave of working. As we progress towards the next quarter with COVID-related curbs and restrictions being lifted, we see positive consumer sentiments and return of normalcy for our business. We remain optimistic about the growth of our business and brands going forward. Thank you, and we will now start the Q&A session. Over to the coordinator for the Q&A.

[Operator Instructions] We have the first question from the line of Alok Shah.

Tarun, can you share some granular information with respect to this Transformation 2.0 journey? And any operational and financial targets that you would have set out for, say, FY '23-'24? Something on those lines, if you can please disclose.

Yes. Yes. We have operation and financial targets as well. We are expecting this to give us more than INR 10 crores of saving in the next financial year because this year is the working part and it will happen over the next couple of quarters when excess of that amount would come through in terms of cost savings or cash release, which can happen on 2 or 3 accounts. One, like I talked about, disintermediation, which itself is -- which will lead to direct servicing of some of the modern trade chains, which was our intended project and we intend to take. E-commerce, we service directly. Modern trade, we want to take it to 80% level where all the large accounts are serviced directly and therefore there will be an improved realization by servicing them directly. We also see business enhancement in terms of getting better coordination with these accounts. The other benefit that I see is cash release. Like I mentioned, we have the project, which is implementation of IBP from SAP, the Integrated Business Planning, which is a supply planning and demand forecasting tool, which we are working into -- which we are implementing that will digitize the entire supply planning piece and move into continuous replenishment mode, which should reduce our stock levels as we envisage, and therefore, have a cash release. There are other projects also, which include projects related to freight management, and in future, some automated -- automation of manufacturing processes. Some of the processes we have already implemented, which are related to sales IP.

Got it, got it. So this would also mean some kind of a portfolio of better breadth in modern trade and e-commerce. So anything that you are sensing from the top line perspective also?

So like I mentioned, the first part, which I talked about, disintermediation. Relatively small on our scale, but still a valuable one where it will lead to higher realization from -- on this -- on the portfolio, which gets serviced directly because the margins go away, which are only a buffer in the system. And also when we work with -- closely with them, we could also improve our service levels and higher availability. Some of those numbers we are putting together, but we are not putting as a target for our business delivery.

Sure, sure. My second question was on the internal guidance with respect to some of the launches extension. So would you be sharing something because as we see the brand always have a lot of potential. In terms of extensions, like how this concluded, Nycil Body Mist. So are you gunning for, say, 1 new launch in a brand per quarter or something of that sort is on the anvil?

You could say that practically that's really what is working. Last financial year has seen a large number of launches. From our perspective, it is very important to see some of these launches taken to the next level. So we have new launches in the pipeline and some of them you will see in the coming quarter as well. But my biggest priority will be to also ensure that the launches, which are on the -- already in the marketplace, they are taken to the next level. We've seen good success of when we persist with a launch and we keep building it even if initially there are challenges, a good example is Sugarlite, which is in the third year of launch, and every year it has doubled, there is importance in persisting with what we have. So I would say a substantial portion of our effort will go in ensuring our existing launches go up, but we do have a couple of big launches in the next 2 quarters as we move forward.

Got it, got it. And I just have a very small third question, if I may squeeze in. I was just doing some calculation as to what could be the potential lost sales because Glucon-D and Nycil could not be sold throughout the quarter. Would that be anywhere -- I mean, I'm not asking for a nearby estimate, but if you can just say that according to my estimate, it's more like 120-ish crore, would it be far less than that? More than that? Any ballpark that you can share?

It's hard for me to comment, but it's not less than that.

[Operator Instructions] We have the next question from the line of Tejash Shah from Spark Capital.

Just first, wanted to start with your general observation on demand uptick or demand scenario post the second wave?

Yes. So at an overall level, we've seen, especially the nonseasonal brands, are showing good resilience in demand. So Sugar Free continues on its momentum, and at a 2-year CAGR level, both Sugar Free and Complan are showing consistent growth at a decent levels. So therefore, that gives us a belief that the demand is -- for essential products is safe and building up. We've also seen in the Wave 2, the quarter gone by, much faster recovery on numbers on Everyuth and Nutralite because it took much longer recovery last year. So the resilience and the recovery of demand has been far better on these brands. And I mean, on just 1-year basis, Everyuth has seen some phenomenal growth, but the base was much lower. So for us, the concern has largely been related to the seasonal impact, if I were to say. Otherwise, we are fairly positive and the overall way demand is building up. And it is broad-based, e-commerce is building up. Modern trade is also coming back in reasonable terms. HoReCa has seen faster recovery this year versus last year.

Fair enough. And Tarun, you spoke about Complan market share, last year, 1Q, we started sharing market share from 2Q. So just wanted to understand the trajectory there of market share is? And b, are we gaining market share disproportionately or higher in a particular channel versus competition or in a particular geography versus competition? If you can comment on that part as well.

Yes. I'll just try and give you a broad outline of how market share for Complan is about. So we've had this brand for about 2.5 years. The first 6 to 8 months, we had seen a substantial drop. After that, our market share has stabilized at closer to 5.5%. And despite our expectation, the numbers are similar level. My personal view is that the market shares are -- I mean, our internal growth reflect a slightly better number, but third-party numbers hold us at a similar level as 5.5%. Sooner or later, it will catch up because our distribution levels are also at a 4-year high. So we've touched 5.72 lakhs as reported by Nielsen. When we got the business, it was close to 4.2, 4.3 lakh. So distribution has gone up. We are seeing resilience. Our internal growth numbers exceed what Nielsen reports. Therefore, we are, if you ask me, quite optimistic on the way Complan is building up and is responding to our initiatives. But from just pure market share point of view, it is stable at 5.5% at an annualized MAT level.

But Tarun, he was asking about the channels also in terms of disproportionate shares.

Yes. Sure. So we've seen -- yes, I can add. So we've seen Nielsen doesn't capture it. Even E-commerce has been very, very responsive to Complan and some of the platforms we have seen a substantial pickup of our shares on Complan. We have also seen that a couple of states, especially UP, Bihar have responded to and seen increase of market share for Complan. We were under pressure in Tamil Nadu, but for last 6 to 8 months, we are seeing that recovery as well. So that whole thing needs to catch up into an overall share improvement. But we are seeing 2 geographies which are responding well. Some of the emerging channels responding well without losing momentum around the base channels of modern trade and GT .

And I think in e-commerce, we have [indiscernible] net share.

Yes.

Sorry, I missed Dr. Sharvil's comment.

Dr. Sharvil, if you could repeat, because I think it got missed.

No. What I said is in modern trade, obviously, we had a higher share, a bit more on Complan versus our overall share and I think you're seeing good trajectory on e-commerce also.

Yes.

And then just staying with Complan and Dr. Sharvil's, one of the earlier comment we made in one of the earlier calls, we were planning to actually leverage on advocacy platform through our pharma connections and pharma relationships. So is there any update on that to expedite Complan's journey there?

So the product did get launched, Complan Nutrigro, which is currently launched through our large pediatric division. So it's tracking well. It's obviously, for the last 3 to 4 months new product successes have been difficult because of nonavailability of meeting doctors and all. But if you look from June onwards, there is a good significant uptrend and on the prescriptions also. So I think in a way, I would say we are delayed by almost 9 months because the whole lockdown made it very difficult to get new product prescriptions. But you can -- at least from the last 2 months and trending forward, I think we are on a good track to now really start doing what we needed to do, which was last year, but now we'll get to see it in this year, the ramp-up.

Great. And last one, if I may squeeze in. Our gross margin tracked well despite all the margin pressure that we are seeing in the system level or macro level also. So any interventions we made in terms of price hikes? Or this was product mix beneficiary also margins at this time?

So we have taken about a little higher than 2% price increase on our portfolio effectively for the last quarter that will reflect. We are also running several cost reduction programs across our products. So some of which may not have fully come in, but -- because we do acknowledge that this commodity cycle may have a longer inflationary trend, so these projects are extremely crucial for us to build on. So some action or intervention from a price perspective and some projects, which we are working on to reduce costs on a long basis.

And I think if I can generally talk about the overall gross margin side, I think we'll -- we have 2 products. One is Complan and the other is Nutralite, where we have some challenges. Complan is manageable and I think we can continue to do better on that. But on Nutralite, once we have a portfolio, which is more balanced and not completely based -- oil-based, but have more products, which are in like in the ghee, butter and also some new segments that we're trying to build. I think the overall portfolio will have a lesser impact on the oil pricing that is there today. So it's not something that will happen in the short term, but in terms of 3 to 4 years, we can see that the whole Nutralite portfolio becoming far more attractive in terms of its net margin profile, which currently is struggling because obviously, it has high dependence on oil.

[Operator Instructions] We have the next question from the line of Kaustubh Pawaskar from Sharekhan.

Yes. So my question is again on the raw material inflation. So for this quarter, how much was the raw material inflation for us? So we have taken 2% price increase and we are also focusing on our cost saving initiatives or efficiencies to mitigate the impact. But in terms of inflation, how much was the inflation?

Umesh, you want to take this?

For -- except for RPO, we have been able to neutralize the inflation for all other products. RPO, we have seen a bit of a good amount of inflation. And we have taken some price increase, but it is not fully adequate to absorb the full price increase of the raw material rises.

So RPO over a period of last 3 to 4 years has gone up more than 90%. So I think that is an unsustainable level. But once we have the product mix better, we can see -- and the cooling off on that, we can see some improvement. But as Umesh said, rest of the things, we have been able to balance.

Yes. On Complan also, we have like accumulated SMP when the base prices were low. So we have been able to manage the price increase of milk as well. RPO is the only commodity where there is a substantial price increase of 90% in that commodity.

Okay. Okay. And my second question is on our international business. In the press release, you have mentioned that international business is performing well for you and it has grown in strong double digits. So what is the current contribution? And if you could show some more highlight on your international trend?

So our international business on an annualized level is close to about 3%, 3.1% and it is growing -- if I were to look at trailing 4 quarters, it is doubling itself every year. The major market stops, 7, 8 markets contribute to more than 80% of our business, which includes markets like Nigeria, Nepal, DCC (sic) [ DMCC ], Bangladesh. And the 2 key products that we sell in these markets is Complan and Sugar Free, including Sugar Free extensions. Of course, we are building the other parts of the portfolio, but these 2 take most of the share and are usually present in most markets that we operate with few exceptions. And we are quite positive about building it forward.

And sir, one [ additional ]. Sir, you mentioned about some one-off in the revenues. Can you just explain that?

Yes. Sure. So one-off in the revenue is a onetime GST budgetary support of INR 5.5 crores, which was received in the Q1 and that is reflected in the other operating income.

[Operator Instructions] We have the next question from the line of Pritesh Chheda from Lucky Investments.

Sir, what would be our 2-year CAGR on Complan and Sugar Free? I missed if you would have mentioned it initially.

So both are in good growth levels from a 2-year CAGR, closer to double digits -- no, actually double digits.

Okay. My second question is on Complan, we were on the distribution expansion side, especially on the general trade. What is the progress there because that's also one of the legs of growth and the progress on various launches because competition seems to have much more variants versus what we have?

Sorry, I didn't understand your first part, general trade what?

Distribution expansion in general trade for Complan?

Okay. So at our overall direct distribution level, we have crossed 0.5 million outlets, which was our plan. We've actually exceeded that by 10%, which in last -- which started in July when we had, post integration, reached about 3.3 lakh outlets. We have now crossed about 5.5 lakh outlets. So that's from a direct distribution menu. If we really look at Complan in specific, which will not just be a benchmark from our internal direct distribution, but availability as measured by Nielsen. There, when we got the business 2.5 years back, it was a little over 4 lakh, about 4.2 lakh or 4.3 lakh outlets. We have already exceeded that number of last 4 years, which is 5.7 lakh outlets. And hence, we are better equipped to take on competition from general trade perspective or point of view as well.

This 5.7 lakh is total distribution for us because I think our total distribution is 2 million, right or this is 5.7 lakh for Complan?

Complan. Complan. I thought you were asking only on Complan. So overall, direct is 0.5 million. Total will be 2 million availability. And specifically getting on to Complan, 5.72 lakh as reported by Nielsen availability.

And where are you on the variants launches?

So from -- we had launched last year, variants on Complan, we launched it Complan Nutri-Gro, which is focused on toddler segment, which is based on a superior nutrition and a better protein formula, which we are promoting through the expert health -- health care professionals.

And on the sachets?

So sachets, we launched last year. We launched 2 sachets. One is 18-gram at INR 5 focused on south and east part of the country and 75-gram at INR 30, focused in north and west part of the country as the markets are structured for the sachets. And we are seeing good traction of sachets. They're meeting all the milestones that we have set for them. So we are quite satisfied with the expansion of sachet business.

So can we see some market share expansion in Complan in the current year?

Yes. That's what we are hoping to see. It's also a disrupted year. So it's not just our problem, but also Nielsen also has been picking up data and I will go with just what their report rather than my point of view. But I hope to really see some expansion of market share for us in this year itself.

And on a 5-year INR 3,000 crore revenue aspiration that we have and the margin expansion side, if you can give some color or some milestones or processes of late there?

So the growth rate that we envisaged, we have really missed some part of it in 2020 and '21, I mean 2 financial years if you were to look at our calendar years. So we missed some numbers, but we are hopeful that if we don't see the kind of extreme disruptions that we have seen in the last 2 summers, we could be back on growth trajectory and also see coming closer to the numbers that we have envisaged for 5 years. On the margin side, we continue to drive -- despite the top line challenges, continue to drive very hard on the cost side. So as the volumes catch up, I think you will see the operating leverage delivering superior EBITDA margins in the years to come...

What are your target on the margins?

So we had said 2023 we'll cross the 20%. We feel lucky maybe earlier, but 2023, for sure, we should cross 20% margin at EBITDA level.

Okay. Lastly, on the debt on the book and the interest cost. Do we see a case where the interest cost will not be there as you progress towards the end of the full year?

Umesh?

Yes, sure. So last year, we repurchased our NCDs to the extent of INR 1,500 crores, and that has brought down our debt level to only INR 565 crore gross debt level. That was further reduced by, again, about INR 130 crores. So current debt level is just about INR 435 crores, and net debt level is about INR 225 crores. So we'll be able to further reduce it. And maybe in 1.5 years' time, you will see that there will be hardly an interest cost.

So reducing that further INR 130 crores and gross debt is INR 440 crores?

Yes.

And net debt is INR 250 crores?

INR 250 crores -- INR 235 crores, INR 250 crores, yes.

Okay. Okay. Okay. And this debt is at what cost, sir?

It is at 5.01%, 5%.

5%. So INR 250 crores x 0.05. It's about [indiscernible] we are reporting about plus INR 8 crores in the quarterly?

Yes. That's a primary sector lending. What I have talked about is the long-term debt. That's primary sector lending for working capital that will just go up towards the end of the year.

So one more. Just a minute. Yes. So what should be our -- so keeping FY '22 aside, but let's say, Nycil and Glucon-D, what do you think should be the growth rates in these 2 brands?

Growth rate for 2022, right? For the next financial year?

No, no, no. Just keeping '22 aside. If '22 aside, in a normal year, what is the -- yes, yes.

Yes, we are quite focused on our double-digit growths on both these brands and we have enough initiatives, and there is room for growing both these categories, we being the leaders. And I think we see good recovery on these numbers as soon as things get normal. So it's good to expect a double-digit growth on both these brands. And Nycil particularly, still very optimistic about these. And so can we look on these so.

And any other launches apart from the dark chocolate that you would have done in the last -- what I heard was dark chocolates, but anything other than that, that we have launched?

We've launched 11 products in last financial year and which includes -- on Everyuth, we launched Aloe Vera. On Nutralite, we launched chocolate spread; and Nutralite DoodhShakti butter spread with probiotics, Nutralite DoodhShakti ghee. On Complan, we launched sachets. On Glucon-D, we will launch tablets with immunity benefit, ImmunoVolt. Nycil, we launched sanitizers and later on we also tested wipes, sanitizing wipes, and we have launched mist, body mist. So we've launched several products in last few quarters and some of them are really building up well for us.

We have the next question from the line of [ Malini Gupta ] from Ashika Stock Broking.

Yes. Sir, I had one question on the raw material. In the last conference call, you had said that basically all raw material increases, et cetera, are passed on immediately in your -- in the margarine brand. So -- but -- and you are having a problem in passing on milk prices, price increases. And this year, I mean in this quarter, you're saying that's the opposite. So I mean, what has changed between last quarter and this quarter?

So let me explain. First of all, I think milk prices harder to pass on because Complan prices are stable, and for almost 3 years, we maintained the same prices, same Complan prices, despite the fact that milk prices have strengthened over the years. We believe as the equity of Complan is getting stronger, we will have better pricing power. But having said that, the swings are not substantial. So even if -- and what we've seen over last 2 to 3 years and swings are not so substantial. So when Dr. Sharvil mentioned the milk -- or Complan, we can still handle. On the other side, when we look at palm oil, normally, in last 4 to 5 years, we have a clear strategy. We wait for some time if the prices go up and are not coming down, we pass on. And if required, if they come down, we are also able to take it back. And this has largely got to do with the institutional segment, the food service part of the Nutralite. Now this time, there has been a very disproportionate increase in RPO, which is beyond -- I think we have not seen those kind of increases at least in a decade and I don't have beyond that data. And while we have taken substantial price increases, on that particular thing we have not been able to pass it on completely. And that's something which is bothering us and that's the reflection of our view. We were expecting it to cool down. But if you see a commodity cycle the way it is shaping up, all oils are moving up. So at some point in time, either we will have to continue taking prices up or something has to give in, and that's the reflection of the concern of Dr. Sharvil when he was explaining the concern on palm oil. At a fundamental level, nothing has changed. Our pricing power in Nutralite remains strong. We are usually able to pass on. But this is something we have not seen in a decade, at least, if not longer.

And sir, if you could just explain whether the milk prices, I mean, whether they have come down or they are -- on a Y-o-Y level and Q-o-Q level, whether they are the same? If you could just say -- talk about the milk prices?

Sure. I'll give you just a quick high level and more details we can pick it up on a separate meeting. But on Y-o-Y level, post 2017, '17 was -- sorry, 2018, we've seen milk prices getting stronger and therefore their prices have gone up on a Y-o-Y level. On the -- and therefore, I expect on Y-o-Y level this year to be almost in line with last year, but they are substantially higher on if I look at 3-year, 4-year CAGRs. On the quarter-on-quarter level, there are swings, but they are not comparable because we try to, as a practice, increase our purchase of milk and converted to SMP when the prices are lower. Sometimes we may not get it right, but more often than not, we are able to handle it. And that's why it may not be so clearly comparable. But annual level this year and last year will be reasonably similar, a difference of about INR 1, INR 1.5 per liter of milk.

And sir, what did you mean when you said RPO, RPO is what?

Refined palm oil.

Sorry?

Refined palm oil that we use for Nutralite.

[Operator Instructions]

I think there are no more questions. We can just wind it up.

Sure, sir. Would you like to make any closing comments?

I'll hand over to Mr. Tarun Arora to make closing comments.

Sure. Thank you, everyone, for all the questions and interest in our business. We are -- we remain quite positive on our -- demand for our business and stay focused on delivering better results in the following quarters. All the best, and see you next quarter.

Thank you, gentlemen. Ladies and gentlemen, on behalf of Zydus Wellness Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.