Zydus Wellness Limited (531335) Earnings Call Transcript & Summary

Ladies and gentlemen, good evening, and welcome to the Post-Results Investor Conference Call of Zydus Wellness Limited for quarter 2 FY '22. [Operator Instructions] I now hand the conference over to Mr. Tarun Arora, CEO of 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 2 financial year 2021-'22. We have with us Dr. Sharvil Patel, Chairman; Mr. Ganesh Nayak, Director; Mr. Nitin Parekh, Group CFO; Mr. Umesh Parikh, CFO for Zydus Wellness Limited in the conference. While the economy was still facing significant headwinds in terms of revival during the first half of the quarter gone by, after a very challenging second wave of COVID-19, the company has showed unwavering determination and kept close vigil on all the nodes of business in order to minimize the impact on people and business. With the improved consumer sentiments and strong on-ground execution during the quarter, the business witnessed good momentum as a result of which the company posted a year-on-year growth of 12.2% in terms of total income from operations. The category of glucose powder and prickly heat powder witnessed degrowth during the quarter in terms of offtakes due to poor season and limited consumer mobility. Our brands, Glucon-D and Nycil hence, got impacted due to these headwinds led by the category while holding on to the market shares. The sales growth for overall business without these brands is substantially higher. At the same time, the company faced significant inflationary pressure in key raw materials and packaging materials as a result of which our gross margins were down year-on-year by 571 basis points as a percentage to net sales. While the company continued to build up the inventory of key raw materials at an opportune time to lock in favorable rate, the company has also taken few calibrated price increases across the impacted brands which would start reflecting in the current quarter. As we kick off our journey of next phase of transformation, the Transformation 2.0, we would like to share a few important updates on this front. The Transformation 2.0 is being planned around broadly 2 growth levers: one, creating a simpler organization structure and achieving cost reduction. Here, the first part, we are looking at reorganizing our Nutralite business for enhanced efficiency and better execution by integrating the sales force into one entity that is Zydus Wellness Products Limited for better customer service with specific focus on retail and food service channels separately, integrating our cold room and ambient warehouses for better efficiency. We're also looking at reduced cost-to-serve through distributor disintermediation in organized trade. The second part of this Transformation 2.0, the digital transformation. The digitization of processes across value chain, which will help the company to be future ready. It would include use of business analytics tools, integrated business planning, employee friendly HRMS tools, freight management tool and sales force automation software, all of which would help automate several key processes. All these are under at various stages of development and implementation. Let me take you through the highlights of the consolidated financial performance of quarter 2 financial year 2021-'22. During the second quarter of financial year 2021-'22, our total income from operations grew by 12.2% to INR 3,837 million. EBITDA was up by 12.6% year-on-year to INR 305 million. PBT before exceptional items was up by 385.4% year-on-year to INR 211 million. Net profit was up by 120.4% year-on-year at INR 215 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, during the quarter gone by, the business was impacted negatively because of the adverse weather conditions in early monsoon in some parts of the country. Glucon-D ImmunoVolt continued to deliver steady business. It was supported with TV campaign during the quarter. On the Complan front, during the quarter gone by, core Complan witnessed a double-digit growth. Complan was relaunched after a gap of 4 years with enhanced proposition, improved chocolate taste, new packaging, along with new campaign to promote the brand. The new Complan focuses on all-around growth with 2x faster growth and improvement in memory and concentration. This is supported with clinical data. On sweeteners front, Sugar Free brand launched its new thematic campaign, "Fitness ka Pehla Kadam" featuring leading Bollywood actress, Katrina Kaif, as its new brand ambassador. This was amplified by 360-degree media campaign on TV, print, digital across the country. Sugarlite continued its triple-digit growth during the quarter across all channels. The growth was supported through consumer promos and impact properties in media, especially on TV and digital, along with on-ground engagement activities to build trials and expand reach of the brand. On the Nycil front, while the offtake remained positive for the brand, the internal sales remained under pressure due to high channel inventory built up prior to the lockdown. On the Everyuth front, the brand continued to grow in strong double digits, supported by ATL campaigns on flagship scrub portfolio and digital inputs on the entire range. The post-lockdown recovery has been significantly better as compared to the last year. We have also launched an all-new range of body lotions with an aim to play in the Livon space in skin care category. On the Nutralite front, during the quarter gone by, the brand witnessed a strong double digits growth in both institutional and retail business. The current institutional portfolio was relaunched as Nutralite Professional range. Nutralite Choco Spread, which was available in [ non-trade ] and e-commerce channels was extended to general trade channel as well. The launch was supported by a TV campaign. As per the MAT September 21 report of Nielsen and IQVIA, 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 5.4% in the Health, Food, Drink category. Sugar Free has maintained its #1 position with a market share of 96.2% in the sugar substitutes category, which is an increase of 181 basis points over the same period last year. Nycil has maintained its #1 position with a market share of 34.5% in the prickly heat powder category. Everyuth scrub has maintained its #1 position with a market share of 39.2% in the facial scrub category, which is an increase of 543 basis points over the same period last year. Everyuth peel-off has maintained its #1 position with a market share of 77.3% in the peel-off category. Everyuth brand is now at #5 position with market share of 6.5% as the overall facial cleansing segment, which comprises of all the face wash, scrub and peel-off other masks. Going ahead, on the positive side, we see subsided, second wave, improved consumer sentiments and upcoming festive season. However, the unabated inflationary pressures could restrict this momentum. We're still committed to navigate this with decent business growth and balance bottom line. We do expect some of our initiatives like simplification of our sales organization with specific channel focus -- channel-wise focus for our Nutralite brand would help us to perform better in the coming quarters. Thank you, and we will now start the Q&A. Over to the coordinator for Q&A.

[Operator Instructions] The first question is from the line of Tejash Shah.

Sir,first on growth, you spoke about the challenges that we had. If you can give some sense on slice and dice in terms of channel mix this quarter on growth and also urban/rural mix, though rural is not that much relevant. But still, if you can give some color on metro versus nonmetro.

Sure. I think one of the things that we've seen is that growths are uneven really speaking. And this, like I mentioned to you in my speech, if we really look at nonseasonal portfolio, the growth is much higher than reported at a brand portfolio level. When I look at channel-wise level, you've seen, for example, e-commerce, seeing a triple-digit growth. It contributes at the overall business level -- business at 7%. Our international business has grown at high double digits, contributes about 5% of the portfolio at overall level. Even nontrade has seen a high growth levels. And is recovering, though the base is not fully sorted to pre-COVID levels, but that's also seen a good growth. Going back to traditional trade and dissecting it to the urban and small town plus rural, which is the super stockist business. We've seen about nonseasonal portfolio about 3 to 4x growth. So largely, the direct urban has been very, very low growth has been the rural and the small towns have driven the growth. So it's -- it's a kind of mix, which is very uneven from a growth point of view. And we are seeing rural or small towns responding well to growth. They are driving the growths much more. In the urban space, is the emerging channels, which are driving the growth. The food service HoReCa has seen a good growth recovery. But the traditional urban retail is still on a lower path.

Okay. And sir, you spoke about making some pricing interventions. So if you could split the growth in terms of broader volume growth and price and mix impact?

So overall, we have taken a price increase of about...

4.2%.

4.2%, of which all of it is not reflecting in our numbers yet because some of it will flow over to the next quarter. But about 2.5% is what is already reflecting in these numbers. Largely, it's led by Nutralite. We are obviously planning forward to take across other portfolio, but this is the current quarter.

And sir, last, almost 3 quarters now, we are maintaining, in fact, 4 quarters, we are maintaining high -- mid-teens to high teens kind of growth or double-digit on safer side. But now as we go in second half of this year, the base is also slightly aggressive. So how are you looking at demand scenario to sustain this momentum, at least having double-digit revenue growth?

So for us, there are challenges because we have to -- in the inflationary situation, there are risks because we are sitting with a high base like you rightly pointed out. And as we have to take aggressive price increases to overcome the gross margin pressure, input cost pressure, we could see some challenges, but we are still hopeful of delivering a double-digit growth going ahead also. I would have preferred a much higher growth, but I think it may be still possible. And this clear growth momentum, we'll have to see if it can happen across all channels. Urban. Urban general trade direct distribution, while it's sitting on a good base still seems to be a little bit continuing to be under pressure. E-commerce, [ non-trade ] will continue to contribute to growth. International will continue to deliver on growth. I do actually hope that monsoons with the recovery in monsoon in the quarter gone by, should also keep the rural momentum up. So these initiatives should help us get a better way to the growth.

And sir, last on margins, you spoke about taking pricing interventions only Nutralite. Is that correct which I heard.

So we've taken -- so largely the impact that you see of the price increases has Nutralite, but we are acting across the portfolio. With the relaunch of Complan, we have taken a small price increase, which will reflect taking price increase in Sugar Free and Everyuth as well. And all of these will reflect in the coming quarter.

This is ceteris paribus, if raw materials stay as where they are and they -- don't enter from here, are we covered to protect our margins from this base?

I do believe so. In the coming quarters, we should be able to maintain our margins, if the raw materials do not go up.

Next question is from the line of Praveen Sahay.

Yes. So my question is related to Complan. As you had mentioned in the Complan, double digit of growth. And I can see their market share is at around 5.4%, and that's quite consistent for quarters -- in the past quarters. So you mean to say that this category itself is growing at a double digit and so as we or we are faster than the industry?

So therefore, for us, we have now seen continuously over last 3 or 4 quarters double-digit growth. If I look at last quarter reported by Nielsen, it is only 4.9% for the category. But my view is, they do not fully capture the whole, at least Complan's growth, and we are engaging with them to either reflect rightly for us or correct the category because we don't see any reason why our growth should not reflect in them. So my view is maybe there will be a certain correction at some point of time from their side because our growth is now consistent for last 3, 4 quarters.

Okay. It seems that Praveen Sahay's line -- sir, it seems that Praveen Sahay's line has dropped. Just a moment. Praveen?

My question -- yes, yes...

Mr. Praveen. does that Answer your question?

So in between, I dropped off. So that..

Let me just repeat for -- quickly on what you asked. I said, look, we are seeing a double-digit growth over the last 3, 4 quarters. So we are seeing a consistent growth. Last quarter, Nielsen has reported a growth -- category growth of 4.9%. By that logic, we should have had a higher -- we should have seen some market share growth, which is not happening. So we are engaging with them. It may be that they are not fully reflecting our growth or the category growth, one of which they need to correct because our numbers are more secular in nature.

Okay. Okay. Great. Next question is related to Sugar Free or Sweetener category. They are also in the lite -- Sugarlite segment, you said triple-digit growth you had delivered. So is it fair to assume your contribution from the Sugarlite is increasing?

That's right. Sugarlite is building up, and it's in line with what milestones we had kept for it. So it is the share of Sugarlite and our overall sweeteners space is increasing, which is a good...

So what is the milestone like, if you can?

So there is no market share, but internal milestones as in -- we had kept a certain set of targets for -- most of the equities, the way we measure it is in terms of milestones we keep at quarterly or annual levels. So it's tracking well on that, and we believe it can become the future large brand for us.

Okay. Or any color on the contribution on your total pie of a sweetener?

That's little too early to comment on that right now. I think in the next few years, we'll be able to give full traction on that.

Next question is from the line of Kaustubh Pawaskar.

Sir, my first question is on your transformation to -- you just mentioned your initial target and emphasize on simplifying the structure and there will be some cost synergies because of it. So any target you have set up that because of this transformation to -- you will be saving this much amount in terms of -- through efficiencies?

So yes, we do have a certain kind of synergy benefit targets, but we can't share it at this moment. But we do see a better customer service, more efficient process and a certain cost takeaway, which we can take through our margins.

Okay. The related question to that is that currently, we are hovering at around 7% to 18% margin -- operating margins. So now with this transformation to your revenue mix is also changing in the portfolio with some of the high margins products, those contribution are expected to scale up. So considering that, should we expect your margins -- operating margins to reach close to 20% by -- over the next 2 years -- 2 to 3 years?

Yes. That's really how we are -- what we are targeting to in the next couple of years to cross that 20% EBITDA margins.

And sir, what is aspiration for the international business? So currently, it is 5% of our revenues. So any plans for the international business, whether you would be launching said number of products every year, you will be expanding your reach. So any thought process on that?

So it's all organic play. We are in an annualized level, we are about 3% to 4%. For the quarter, we did 5% because we have a mix between Q4, Q1, where the numbers are different on the base domestic business. Our wish list is to take it to 8% to 10% level. We are looking at expanding more countries and more products. For example, we've just launched a no-sugar-added Complan in Middle East. We are also exploring more products. But the top 5 countries, which we are shortlisting -- shortlisted which will contribute bulk of our business, and we will build further on it. For example, we have just in the process of setting up a subsidiary in Bangladesh, which we believe can be a good potential future growth opportunity for the international.

Right, sir. And just one more on the price increase front. You mentioned that you've taken 4.5% kind of price increase in your portfolio. So any -- how much more price increase do you think you have to take to pass on the current level of raw material increase. I can say that the inflation is kind of there and might firm up further. But at current level of inflation, what kind of price increase is it required?

I think another 3% should help us manage this cost inflation. Some of which we have already rolled out and will reflect in the next quarter results.

Our next question is from the line of Alok Shah.

Sir, my first question is on Nycil and Glucon-D. Can you highlight the key states where the erratic monsoon would have led to the subdued sales? Is my voice audible?

Yes. You are audible. I think Tarun, are you on mute? I think -- so maybe, it's Sharvil, here. So I think it's mainly to do with West Bengal and then some part of Northeast.

Got it. Got it. So this would be largely 2 states, which anyways are overly skewed for these 2 categories, right?

Yes. And this last year, you saw the cyclone and as well obviously, the whole peak of COVID with lower summer so -- I think 2 years, these 2 brands have had an effect. Nycil obviously did little better in the last year, but this year, obviously, it couldn't. But I think as the situation normalizes and we have normalcy in terms of the peak seasons that we have, we should see better traction going forward.

Got it. Got it. So actually the question is that how do we plan to derisk, right, from largely being focused on 2 state to going more into more states? So what are the steps that we are taking for that?

So there is good traction in Bihar now. We have a very good business in Bihar and some of the parts of UP. So I think Glucon-D is on that trend. Nycil has a good balance. So Nycil doesn't have complete SKU, and we are trying to see how do we build up the south market for many of these brands and also the west. So because of the whole distribution alignment that has happened and even the distribution increase that has happened, we are seeing good traction in West and South, but the early signals -- good signals have been in Bihar and some of these other states. But they are being transferred to other -- I mean, we are seeing good traction coming in other places also, but that will require a few years before things normalize. Also, seasonal and nonseasonal, we believe Complan and Sugar Free and Everyuth and Nutralite can offset some of the seasonal biases that are there today. And that's the whole work that we're doing. Earlier, we had talked about a second summer and how do we build for some of these brands for second summer. Obviously, we have not had that opportunity in the last 2 years. But as things normalize, we'll get to see some new extensions, which can be -- the season can be extended towards the second half also.

Got it. Got it. My second question is on the ad spend. So while we are doing lot of adjacencies in product launches, the ad spend rate for the current quarter was slightly lower than on a Y-o-Y basis and on an usual run rate also. So anything to call out over here or will catch up as we get into second half of the year?

So I think on the ad spend, what you say is right, but I think we are being more judicious in terms of where we can spend. Obviously, everything has not been back to normal. And we have had high impact activities like, if you see for Sugar Free and Complan, we have had those important activities on KBC and others. So I think we're being more targeted towards it with more normalcy back and more metros and others showing better trends. We'll see this improving. And a lot of times, it is also driven by relaunches or new strategies. So Complan had that. Similarly, we are working on Sugar Free also. And I think somewhere the ad spend will now increase once we see traction on some of these brands on the Tier 1 in metro side.

Got it. Got it. And my last question is on the upcoming product launches. Anything that we should watch out for in a category? Or you think, it will continue to remain more secular?

No. So I think Everyuth will see good traction with new launches, and we are very excited about it. I think the brand has strong good buoyancy this year and all lines are moving well, and we are seeing new launches there, specifically, to do with the winter range. Similarly, the whole Nutralite franchise where we entered into the milk-based products with the butter, ghee, also in mayonnaise, choco spreads. I think you will see that category on food services expand significantly for us. And Sugarlite is an introduction there. Chocolate is something that we have introduced, and we are seeing a few more introductions to in the sweetener basket, which will add to the overall business side of it. And going forward, I think all of these are the likely introduction that you'll get to see -- some already happened and some that will happen over the next 12 months.

[Operator Instructions] Participants, we have lost the connection for the Mr. -- for the management. We'll just wait for a few moments before -- while the management connects just a moment, please.

I think we lost the voice.

I think you...

Yes, we have the line reconnected now. Our next question is from the line of Shirish Pardeshi.

I have 3 questions. The first question is on the Complan. We have done this relaunch. Is that the conscious strategy which we are trying to bring in the change in formulation and trying to price up the pyramid?

No. There is no fundamental change in formulation. We have just improved the taste. So there is a minor shift in the flavor thing, but our clinically proven formulation, there's no fundamental shift. But we do believe that -- we've enhanced the proposition which is based on clinical data to focus on all-round growth, not just the physical growth of 2x faster height but also memory and concentration, which is clinically proven.

And I think if I can add to what Tarun is saying, we also have launched for us, we are segmenting the market also, and we have launched high-value product in the prescription side also, which will again build on the credibility and at the same time, improve the profitability of the brand. But it's very early days. And last 1.5 years, we have not seen the clinic movement as much as we wanted. But as things have normalized, we believe that, that will add an additional thrust in terms of upscaling the value on Complan also and also segmenting it, right?

Got that. The whole question is around, we are in the range of about 5%, 5.5% market share. So what is it that we need to do to get to our old share of 8% to 8.5%?

So to answer that, I think there are 3 or 4 things that we have got. I think one of the important thing was the proposition needed to be enhanced to have a full-growth proposition for the consumers, where today's consumer is much concerned about the mental development as about the physical development. And this new proposition addresses that. There were some concerns about the taste acceptance of the consumers, which we have addressed. In the last 1.5 years, we have also upped our distribution focus and we're also reaching out because as the category is getting more and more segmented and the role of the influencers and the doctor's advocacy is playing a role. So direct doctors advocacy on the base Complan as well as using the other segments like the toddler, which Dr. Sharvil just mentioned. These all put together should help us gain share. We already see a momentum on the -- we already see a momentum on the brand and in terms of our internal growth, I think market share should also catch up as we move forward.

Yes. Maybe a related follow-up on that, which is the largest distributor brand. I'm sure Nutralite is not the comparison, but could be Nycil or Everyuth. So is the Complan distribution is ahead of that?

So from a direct distribution, I think Complan will be amongst the most distributed, but most available brand as captured by Nielsen today is Nycil. Nycil and Glucon-D are in similar zone, but in last 1, 1.5 years due to Glucon-D being under pressure peak season, Nycil is available in almost 1.5 billion outlets.

Okay. My second question is on Sugar Free. I think we have done a lot of variation over last 6, 7, 8 years. And I think we -- now successful intervention, which is happening. I mean, I understand you don't want to give the number. But other than the pure Sugar Free format, what are the new things which you can expect because you are being a market leader and now you're almost crossed 96% market share. So I mean, fundamentally, you have the challenges to grow the category. But I think the new formats what we have tried, what is it that we can do further?

I think fundamentally, we have to overcome consumers' resistance to try and shift. It's a habit-changing thing, where we have both the headwinds and tailwinds, and we are working on both addressing the -- riding on the tailwinds, which are clearly in the focus of healthier alternatives, which Sugar Free fits in. And overcome the headwinds which are led by concerns on sweeteners. We are addressing both of them together. Sugar Free Green, we got good early success when we launched in 2017. But we -- it plateaued. Now we have relaunched, and we expect that it should help us overcome these resistance that consumers have of adoption, between this and some of the food categories that we are evaluating. I think we should make -- take the Sugar Free brand in next few years to the next level that we aspire into.

That's exactly which I was asking you, Tarun. So is that more than Sugar Free, we need to have some flanker brands or maybe something which can get into the adjacencies. Is that the attempt which will strengthen the core platform?

That's correct. So we're already testing our learning the chocolate space with e-commerce will probably expand that in next few quarters. And there are a couple of other spaces which we are evaluating. Too early to share at this stage, but we'll have to do enough homework because I mean, for our size, we have enough number of categories. I also want each category to have better productivity. So whatever we get into, we'll do enough learning because it takes a whole amount of organizational energy to launch more products and to win in those products. So we are doing a homework on those type of approach.

Okay. Just last question from my side. What is our saliency coming from e-commerce and modern trade? I'm sure with the relaunch, you would definitely have the focus on these new channels.

So e-commerce itself, quarter gone by was at a total business level 7%, domestic retail it was almost 8.5%. So this has beaten all our own internal estimates. So e-commerce continues to drive at a very, very aggressive pace. My guess is e-commerce and on non-trade put together. And as some of these platforms are also doing a convergence at the back end and front end, sometimes whichever way you want to look at it, they put together, could become a 20% of our domestic business on a sustainable basis.

[Operator Instructions] We're just waiting, sir. We don't see any more participants joining in the question queue now. So if you would like, we can wait for a few -- wait for a minute or 2 more.

I think just -- I think your system has not worked well. I have been disconnected 3 times now. So I do feel that you guys need to sort this out.

Yes. Even we struggled.

So I do take it up with this Chorus team because it's a horrible way of managing it. We can end this because I think maybe a lot of people got disconnected also even I got disconnected 3 times.

Yes. Shall we close?

Sir, we don't have any questions in queue.

So thank you, everyone. And wishing you all a happy and safe Diwali. And see you next quarter.

Thank you.

Thank you.

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