Zydus Wellness Limited (531335) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Zydus Wellness Q2 FY '24 Conference Call, hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manoj Menon from ICICI Securities. Thank you, and over to you, sir.

Hi, everyone. It's a wonderful good morning and afternoon, good evening, depending on the part of the world you are joining this conference call from. As always, it's our absolute pleasure to host the management of Zydus Wellness Limited to discuss the recent quarter results. The company is represented today by Dr. Sharvil Patel, Chairman; Mr. Tarun Arora, CEO; Mr. Ganesh Nayak, Director; and Mr. Umesh Parikh, CFO. Without much ado, over to the management for the opening remarks, post which we'll open the floor for Q&A. Over to you, sir.

Thank you, Manoj. Good afternoon, and welcome to the post results teleconference of Zydus Wellness Limited for quarter 2 financial year 2023-'24. Like Manoj mentioned, we have with us Dr. Sharvil Patel, Chairman; Mr. Ganesh Nayak, Director; and Mr. Umesh Parikh, CFO, with us. The FMCG segment witnessed a mixed quarter in terms of demand recovery. While urban segment continued to grow, the rural segment lagged recovery in demand due to rising food prices and uneven weather patterns across the country. The Personal Care segment registered a high double-digit growth, aided by growth in Nycil brands due to hot and humid weather in many parts of the country. The growth was further accentuated by a strong traction of Everyuth brand. The company's Nutralite brand also saw a strong surge in volume demand. However, value-led growth was suppressed due to reduction in market-driven prices. In line with category, Complan brand has seen revival while continuing to increase penetration. In the Sweeteners segment, growth remained muted due to absence of sales of Sugarlite on account of continuing trademark litigation of the brand and sectoral headwinds. As a result, the company's Food & Nutrition segment witnessed a flat quarter in terms of growth. The company registered consolidated net sales growth of 2.6% on year-on-year basis. The company continues to recover the gross margin during the quarter, aided by moderating rates of key inputs and calibrated price increases taken earlier. As a result, the company has registered improvement in consolidated gross margins on net sales by 198 basis points on a year-on-year basis. Let me take you through the highlights of the consolidated financial performance of the quarter 2 financial year 2023-'24. During the second quarter of financial year 2023-'24, our net sales grew by 2.6% to INR 4,379 million. EBITDA grew by 3.7% year-on-year to INR 168 million. Reported profit before tax grew by 4.9% to INR 86 million. Reported net profit was down by 30.6% year-on-year at INR 59 million, mainly on account of deferred tax liability, which is a noncash item. With that, let me share some of the highlights of the operations for the quarter, which will also cover the category growth and market share numbers as per MAT September '23 report of Nielsen and IQVIA. 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, we continue to drive consumption of our new variants of sachet and mango-flavor during the quarter through active digital and engagement with consumers. The glucose powder category has grown by 1.2% at MAT level. Glucon-D brand continues to maintain its #1 position with a market share of 60.0%. On the Complan front, the company has registered ahead of the category volume uptick growth. With continuous efforts and necessary interventions, we have witnessed growth in penetration by double digits. The Health, Food, Drinks category has registered a growth of 4.3% at MAT level. Complan market share stood at 4.4%. On Sweeteners front, Sugar Free brand continued to show good uptick growth during the second quarter as well. We continue to hear our new communication campaign with Celebrity Katrina Kaif for driving Sugar Free Green. We also participated in several key PR initiatives like Dr. Mohan's International Diabetes Update 2023 and vernacular KOL videos on digital platforms, to strongly counter any negative perceptions around non-nutritive sweeteners. The brand continues to maintain its market leadership with a market share of 96.1%. On the personal care front, Everyuth brand posted yet another quarter of strong growth. The face scrub category has registered a growth of 6.2% at MAT level. Everyuth scrub continues to maintain its leadership position with market share of 43.4%, which is an increase of 162 basis points over the same period last year. The peel-off category has registered a degrowth of 0.5% at MAT level. Everyuth peel-off has maintained its #1 position with a market share of 78.9%, which is an increase of 75 basis points over the same period last year. The Prickly heat powder category has degrown by 2.1% at MAT level. However, Nycil has registered double-digit growth and maintained its #1 position with a market share of 35.2%, which is an increase of 19 basis points over the same period last year. On the dairy and spreads category front, Nutralite brand has registered double-digit volume growth for the quarter aided by institutional sales. The company hopes for a further recovery in demand due to upcoming festive seasons, and we are working towards maintaining its gross margin recovery. 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 Mr. Abneesh Roy from Nuvama Institutional Equities.

Yes. Just one question I had. So on Complan and your dairy business, in terms of price hike last 1, 2 years, the entire industry and you must have taken price hike, there is a correction in the milk prices. So do you see your margins bottoming out once the inventory level, et cetera, corrects? And second related question on Complan is, the market leaders saw a volume dip in Q2. So specific to Q2, how is your volume performance in Complan?

So with the milk prices stabilizing, I think we do hope that across the value chain -- dairy-led value chain, we should see margins only improving. In terms of our volume, like I mentioned, Complan has seen a volume improvement in quarter 2.

But are you calling that out as a good structural improvement given your base, et cetera, I understand, was a bit soft. And market share is also taking a lot of activation, promotions, sampling, et cetera. So how do you judge this from a 2-year perspective? Y-o-y, I understand.

So I think, for me, the structural shift is because we are seeing a penetration going up, and that's a good sign because we are recruiting new consumers. And I look at over last 4 years, every year, we've been improving our -- widening our consumer base. And that, I think, is a good sign, which is really aiding the volume growth. Yes, you're right, there was a dip, but -- about a couple of years back, if I look at it, there was also a substantial volume increase during the COVID times. So over 3 to 4 years' period, I think this was a very positive thing. We just have to focus on sustaining and building around it.

[Operator Instructions] The next question is from the line of Mr. Tejash Shah from Avendus Spark Institutional Equities.

My first question is on, if you can disintegrate the growth for the quarter in terms of volume value. And also if you can give some qualitative indication of which brands actually did better than the company average and which failed relatively poorly?

Tejash, thanks for this. I think we've started giving a little bit of separate numbers to help you understand. So first of all, I think at a volume level, we've had a flat volume growth because some of the brands have had higher than some others. Just to look at it, I think Food & Nutrition, like we explained, is flat for the quarter. And Personal Care, both the brands have aided double-digit growth. Within the Food & Nutrition, while we've seen Nutralite because it's more reflective of the underlying oil and other ingredients impact, we've seen a high volume -- double digit volume momentum, which at a price level because we have to give corrections like any oil-based brands, therefore, it pulls down the price realization. So those are the major drivers of these volumes.

Second question pertains to Sugarlite. You called out the litigation disrupting the business for a while. So just wanted to understand what percent of total turnover comes from that, which would have got impacted this quarter? And any visibility -- I understand it's under litigation. Any ballpark visibility that you're going to give in terms of where -- by when do we expect to kind of see the back of this crisis?

So it's about 3% to 4% of our business in the lower quarters for us. We don't have any specific visibility. We are just hoping for a quicker resolve, and we are engaging with Supreme Court to clear the exemption that we have.

Sure. And sir, you spoke about after many quarters, we have seen some tailwinds on the gross margin side. So how are you reading -- coming second half and then beyond that, the near term, how are you reading these tailwinds panning out in terms of gross margin visibility? And where do you see this year, ending up on this number?

I think we've clearly seeing the nondairy portfolio leading the improvements in gross margins, which we've talked about. Now dairy also stabilizing with a minor drop, I think we're hoping even that stabilizes, we are looking good to continue this improvement in margins. I can't give you a specific answer, but only should the -- remain same or get better than this on improvement versus last year.

Got it. And sir, last one, if I may. Last quarter, we had some concerns pertaining to this WHO guidelines on aspartame. Now this quarter, you -- at least the presentation, it seems that we are not as much worried as we were last quarter. And even if I see aspartame prices that you have shared as a raw material, that has also not shown any weakness and then perhaps I'm over-reading it, but I just wanted your insights on the same.

So just to -- we look at 2 levels -- 2 or 3 levels. We are reading from the market through the social listening about the talk on aspartame concerns our own tracks. I think that huge amount of impact that was there in terms of conversations that has actually died down. It's reduced. Our track is picking up less. From an uptick perspective, given by IQVIA, it's showing the positive movement. And that's really what we are hoping will build. In market, it still has to translate into -- back to normal thing. It hasn't. So we are just hoping that it will slowly translate into positive regular numbers.

The next question is from the line of Mr. Umang Shah from Banyan Tree Advisors.

If you can tell me what was the... [Technical Difficulty]

Mr. Umang, we cannot hear you. You are not audible.

I just wanted to confirm what was the contribution of Sugarlite brand for the last 6 months?

So it's about closer to 4% in the weaker quarters, annualized will be half of that.

Okay. And sir, this litigation is going on since 2020, right, the first filing. So do we see this resolved in this coming year? Or will it be pushed to next year, any idea?

We are hopeful of it getting sorted, but the litigation is not in our control.

[Operator Instructions] The next question is from the line of Mr. Dewang, an individual investor.

My question is on EBITDA margin. Why are EBITDA margins so low compared to the peer group and as an industry as a whole, for the quarter?

So thanks for this question. I think if you look at it, we have a seasonality. And therefore, the EBITDA margins need to be looked at in total because we have a high seasonality and therefore, quarter 4 and quarter 1 have -- tend to be significantly higher and quarter 2 and 3 tend to be much lower because seasonality is impacted. So better to look at either trailing 12 months or annual picture.

Even in the previous quarter, it was only 14%, 15%. Can you guide what is our aspirational level for the EBITDA margin?

So we had said that while we were at 17%, 18% due to huge inflation over the last 2, 3 years, we've seen those dropping to closer to about annualized level of 15%. We expect over next couple of years, we will claw back to a 17%, 18% level and then plan further steps to improve it.

And sir, next question is revenue growth is significantly below inflation levels. And what would be the key drivers for the next few years and pathway to increase ROE over the next few years?

So there is a mix impact. I think some of the brands have actually done significantly well. There is also the demand impact, which like in my starting point, I mentioned, there is a certain demand, which is impacted in the overall FMCG space also. We hope and expect that we should be back at double-digit growth in the coming quarters. Demand should get better by at least quarter 4. And in fact festive season also, most of us are hoping should lead to a better demand and by quarter 4 should be back to better demand and better growth numbers.

Sir, any light for long-term picture, like 2 years, 3 years, not quarter-wise, Q4?

So from a medium-term perspective, we are committed, and we do believe we have a strong portfolio which can deliver continued double-digit growth on the back of growing our categories, expanding the consumer base. And also competitively, we are well placed to win in that marketplace. So we do believe a good double-digit growth is what we should be looking at over 3 to 4 years.

And sir, any light on ROE?

So ROE, as you know that because of the acquisition, ROE tends to be generally lower because the inclusion of goodwill. But as we go forward, we have earlier given a guidance that we'll be touching the ROE of 10% in 3 years' time.

Okay. And my last question is, as we are more of a wellness company than an FMCG company. Is there any plan to expand into ayurvedic space and build any brand around that or acquire any company in that space?

So we are -- business deployment is a constant part of our effort, whether it's internal innovations as well as acquisitions. We have reasonable capability around some of these things. But no specific plans to share at this moment. When we have something specific, we'll be able to share it.

[Operator Instructions] The next question is from the line of Mr. Madhur Rathi from Counter Cyclical Investments Private Limited.

Sir, my question was regarding the -- similar to what previous participant has asked. Sir, our revenues have not grown above the inflation rate. Sir, if you could just explain the growth path when will lower double digit and how we will achieve this margin -- revenue growth as well as margins, it would be very helpful.

So if you look at it, last financial year, we did grow at 12%. This year, I think especially the first 4, 5 months have been substantially impacted by one largest component has been our largest brand, which has a seasonality and due to very -- weather impact has had a challenge, mainly Glucon-D. And that actually has pulled down in the overall growth, if I were to say. We do expect that things should be back to normal starting quarter 4. And even now as things -- as festive season appears -- starts, things should only start getting better from a growth point of view. Over next 2 to 3 years as an earlier caller had asked, I think we do expect back to a normal double-digit growth for us.

Okay, sir. And sir, we have guided on a buyback, so how are...

Can you repeat the question?

So regarding the buyback that we have discussed over the last quarter, so is there any momentum on that?

There is no discussion on buyback. Board will...

No sir, just the idea is -- for the buyback. That's why I'm asking that has there really any momentum on that?

No.

Sir, I wanted to understand, sir, with Complan in our portfolio right now, will there be a decline in seasonality going forward? Or will the seasonality be continue for the next 2 to 3 years?

Seasonality is part of our portfolio mix, where 2 of our brands, Glucon-D and Nycil have a substantial share in the summer seasonality. That's part of the mix with Complan, Glucon-D, Nycil all the brands being there in the portfolio. So I don't think structurally, I see any change while we are committed to build on nonseasonal brands, but I think the overall structure shift, I don't see over the next 2 years.

[Operator Instructions] The next question is from the line of Mr. Karan Bhuwania from ICICI Securities.

Sir, firstly, I'd like to ask about the international business, how has the performance...

If I were to look at -- sorry, can you repeat?

I'm sorry, sir, just wanted to let Karan sir know that you are not audible enough, sir.

Firstly, I want to do get your views on international performance -- business performance, how is the performance...

So if I look at first half of the year, we continue -- we had double-digit growth on international business. It is slightly lower than our expectation because one of our major markets, Nigeria, particularly had a severe currency devaluation due to which some of our business had got stuck. I think with things getting now streamlined, it should only come back. All other markets continue to grow and grow double digits. So overall, I think for first half, we are in double digit zone. We can do much better as these are external factors, which we'll have to rebuild as we keep building this business organically.

Got it. Secondly, sir, if I look at your ad spend, the ad spend has been flat on an FMCG terms year-on-year, right? And if you look at most of the other FMCG companies, they have been including their ad spend significantly say somewhere between 30% to 35%, so that's in the company. So will this underinvestment in ad spends could impact our growth in the future? Or how do you look at it?

So we are equally concerned about any advertising track. So I think over a 2- to 3-year period, if you look at it, I think, we won't have been much lower in terms of spend's direction. More importantly, I think we've also taken significant actions in terms of optimizing our investments in terms of our cost efficiencies around some of these things. Going forward, I think as the gross margins expand, we will continue to invest back on advertising as the biggest priority for us.

[Operator Instructions] The next question is from the line of Mr. Shirish Pardeshi from Centrum Broking Limited.

Looking at the slide on raw materials, Slide 6 and 7, I think barring about milk, RPO has come down, aspartame and stevia prices were also looking sequentially down. So just wanted to check if milk from here slides another 10%, 15%. Is it safer to assume that second half of our gross margin will be significantly higher, say, from 44.9%, what we have reported in this quarter?

So we do believe our -- we have seen a 200 basis points improvement or 198 basis points improvement over last year in quarter 2, that's the kind of trend over last year we would see in HY 2, more led by, of course, non-milk prices, but milk also have been stabilized and slightly, I think, we should be able to -- that's our view as well.

Yes. That's helpful. I just wanted to check. I mean, just to continue, do you think second half our ad bill will be higher because right now, the consumption and the discretionary is taking toll, but if there is a significant improvement, do you think the ad spend will inch up in next quarter and the EBITDA will reach towards 14%, 15% range?

So I think our ad spends will be in line with what we've been doing last year. I don't think there's a disproportionate increase, but we will be looking at significant opportunities specifically in quarter 4 as the business gets larger and we can -- with the better margins, we should be able to invest back more aggressively.

Okay. My last question on the Everyuth. I think over the last 5, 6 quarters, we have done a lot of work in terms of distribution. I think what is holding the growth? If you can -- I mean, peel-off, we are undisputed leader. So there is no question. But the other 2 segments, we have done revamp of packaging and other things. Distribution focus is also there. But what is it when we see the double-digit growth in that segment?

So we're seeing a double-digit growth. There is no reason. Actually, it sometimes Nielsen, because of being smaller segments, doesn't do justice to what the brand is doing. And that's why we've given a Personal Care, which captures both Nycil and Everyuth. And Everyuth is a significant portion of quarter 2 numbers. So you can take for us that not just one quarter, but over several quarters, we have seen consistent good double-digit growth.

One follow-up. Do you think we need to expand other segments of Personal Care and Everyuth brand?

Absolutely. Absolutely with you on that. I think scrub and peel-off have demonstrated what we can do with this brand and how the strength of this brand is. We are clearly evaluating 2 things to build on. One is body lotions, which will help us deseasonalize. We are -- while face wash has also grown well for us, but more so in specific channels. We will be looking at more innovations, more work to expand the portfolio and see how can Everyuth be a much larger brand, given what we have seen in terms of traction in each segments.

The reason why I'm asking because on e-commerce, our sales has already reached 10%. So is Everyuth is under-indexed in the alternate channels, for example, modern trade?

Not really, this 10% -- so overall, our business is about 20% between modern trade and e-commerce, 20%, 22%. And Everyuth specifically needs this in these channels. So it's not underleveraged. Actually, it has been always ahead of the rest of the business. It's actually -- the lower side is brands like Glucon-D, Nycil, which have a larger rural presence and a wider deeper presence because of more [ SEC BNC ], but Everyuth does very well on e-commerce. We are doing well across channels. So we have the flashes which reach out to lower pops' strata and the larger packs which go for e-commerce and modern trade.

[Operator Instructions] Next question is from the line of Mr. Manoj Menon from ICICI Securities.

Tarun, one question on the sales vector of growth, whether it in terms of numeric distribution, or whether in terms of line selling. If you can just talk a bit about, let's say, how that has panned out in the last 2 to 3 years? And how do you see the medium-term?

So if I look at it over the last 2 to 3 years, we have done specific actions across our channels to expand GD in terms of direct distribution, which used to be about INR 300,000, INR 350,000 about 3 years back. We've taken it to INR 600,000 plus. On e-commerce, clearly, when before COVID, which was 1%, which we started doing about 9-odd percent, 8%, 9%. [indiscernible] which went through its own challenge, we have really expanded our portfolio. Food service because Nutralite we've taken a focus action. So across the portfolio, we realize that if we have to grow our brands and we being leaders, sales would be a critical element of driving this activity. The outcomes of each of these is where we've seen e-commerce playing a very good role in terms of both expanding our portfolio as well as our market share within this flow it doesn't get reported in Nielsen and therefore, some of those actions get missed. Also, we've come up with specific packs in modern trade and e-commerce to drive this agenda, which I think is a requirement of this organized trade and which we are working on. From our food service also, we've seen a portfolio Nutralite really helping us expand. I think GD has been, I would say, something which we think we have invested consistently. We have expanded our distribution, but the outcomes are less than satisfying, which is not just true for us, but I hear other FMCGs also talking of a similar thing, where the share of general trade has fallen. So we continue to drive our efforts because we feel access will continue to play a very critical role in category expansion. And therefore, we stay focused on it. We are taking multiple actions now where we think one is, of course, to continue to increase our distribution, but also increase our pack efficiency -- pack productivity also more SKUs per outlets that we cover so that we are able to get better value out of general trade. But that's a little bit more external factors which are driving it. So overall, I think, satisfied with the effort, we can continue doing it. We used to be 1.8 million availability as reported by Nielsen combined business level when we acquired. Today, it's more than 2.5 million. My wish list is we could cross a 3 million outlets stocking Zydus Wellness products. And that's really where we would want it to be in the next couple of years, maybe.

The next question is from the line of Mr. Dewang Saraogi, an Individual Investor.

As the promoter is on the call, I want to ask him whether they are interested in buying more shares from the open market, if they can comment on this.

So I think, currently, I don't think we have any additional comments because the promoter family group, decision is not made in this room, it's made separately where we are not involved as part of the decision.

As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Thank you, everyone. Season greetings and happy Diwali. We will see you in the next quarter.

Thank you, sir. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.