Zydus Wellness: A market leader in underpenetrated and niche FMCG categories

Zydus Wellness has strong market share in niche health and wellness categories of the FMCG market and could be considered as buy in your portfolio. Its portfolio of brands include:

  1. Sugar Free – sugar substitute
  2. Nutralite – butter substitute
  3. EverYuth – skin care products
  4. Actilife – health drink

Sugar Free

The number of diabetics in India are expected to increase from 65.1 million in 2013 to 109 million by 2035. India has the second largest population of diabetics in the world lagging China with 98.4 million diabetics in 2013. To get a sense of the magnitude of the problem in China and India we can compare them to the USA which has the third largest population of diabetics in the world. USA had a diabetic population of 24.4 million in 2013. Additionally, India has a population of around 80 million in the pre diabetes condition.

We are looking at a population of diabetics and pre diabetics 145 million who would like to control their intake of sugar in India, creating a large opportunity for sugar substitutes in India.

The challenge is that less than 5% of the target population are using sugar substitutes. With a more than 90% market share in the category of sugar substitutes, Zydus Wellness has laid a solid foundation on which it can tap the huge opportunity. However, its ability to change penetration levels in the category is still to be seen. Its ability to leverage its market share to drive penetration can lead to multi-bagger returns given that Sugar Free is contributing nearly half the revenue of  Zydus Wellness. If it is unable to drive penetration, it would continue to be a stock built on opportunity.

Nutralite

Nutralite has about 40% market share in a category of butter substitute/ margarine. A 40% market share looks solid but again the issue remains the category growth.

EverYuth

EverYuth has three categories

  1. Face wash – It has about 2% market share in category of around Rs 16 bn.
  2. Scrubs – It has about 30% market share in category of around Rs 1.8 bn.
  3. Peels – It has about 90% market share in category of around Rs 0.8 bn.
Similar to the Sugar Free brand, if EverYuth is unable to grow the categories of peels and scrubs there is no story unfolding in the stock. Its position in the face wash category is not materially significant in the larger story.

Actilife

From a stock perspective, Sugar Free has to deliver rather than Actilife. At this point in time Actilife is not materially significant.

So do we buy the stock?

The stock is very expensive on a PE basis given that revenue and earnings growth have been anemic for the last three years. However, the stock is not expensive if we see it from the opportunity available and the market share Zydus Wellness commands. One can buy it only at times of market panic when the stock price falls. Once it has been bought, one needs to keep looking for evidence of increased category penetration. If category penetration is not going up over a period of time then it will turn out to be a stock built on hope. The focus should be on Sugar Free, rest can add to the icing on the cake.

Where is the margin of safety?

Zydus Wellness has cash reserves of Rs 3.4 bn which translates to around Rs 86 per share given a stock price of around Rs 720 and does not look like much. Given that Zydus Wellness is generating positive cash flows, the margin of safety can only increase over a period of time.


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