ZYWLAV110810

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IndiaEquityResearc

FMCG

August11,2010

A D D ZydusWellnessTargetPrice(INR) 649 Scaleandqualityofgrowthcanextendtherally

CompanyReportThe momentum in Indias wellness market exceeds that in the FMCG

market.Lifestylechangesarecreatingdemandfortherapeuticaswel

aspreventiveproducts.SugarFreecanleverageoffsteepgrowthinthe

diabeticpopulation.Risingdiagnosisandusagemaydoublethemarke

for sweeteners within three years. Nutralite is a play on cardiac care

andprevention.ThethreeyearCAGRof25%and35%inrevenueand

netprofits,respectively,revealsthatZYWLsPEG iswellbelowpeers

WeinitiatecoveragewithaJun11targetofINR649andanAddrating.

Nicheplayonwellnesscategories

Positioned as a wellness company, ZYWL is a niche play on the INR113.6bn

Indianhealthandwellnesscategory.With50%oftheIndianpopulationinthe

2550yearsagegroup,thegrowthforwellnessproductsislikelytoberobust

According to a study by Tata Strategic Management, the wellness market i

estimatedto

reach

INR355bn

by

2015.

The

company

has

apresence

in

these

categoriesthroughproductssuchasSugarFree,whichhas82%marketsharein

artificial sweeteners, and Nutralite, which has a market share of 65% in

spreads.Combined,theseproductsaccountfor76%ofsales.

Increasinghealthailmentslikelytodrivedemandforwellnessproduct

At50.8mn, Indiahadoneofthe largestdiabeticpopulations inFY10.Withan

improvementinhealthawareness,thediagnosticandusageratesarelikelyto

increase, leading to a rise in the number of diabetics consuming artificia

sweeteners from2.96mn inFY10to9.6mn inFY15f.This implies theartificia

sweetenermarketislikelytoincreasetoINR2.7bninFY13f,upfromINR1.25bn

in FY10. Sales of Sugar Free (share of 65% in table sweeteners and 17% in

baking)arelikelytogrowataCAGRof29%duringFY10FY13ftoINR2.2bn.We

estimateaCAGR

of

22%

in

Nutralite

sales.

Thus,

ZYWL

is

likely

to

report

aCAGR

of25%insalesduringFY10FY13f.

Sikkimunitlikelytodriveprofitability

ZYWLissettingupafacilityinSikkimtomanufactureEverYuthandSugarFree

Thisislikelytodecreasethecompanyseffectivetaxratefrom34.6%inFY10to

19.0% in FY12f. However, it is unlikely to impact net sales growth as the

company avails excise benefits on sourcing finished products from backward

areas.Asaresult,netprofitislikelytogrowby39%inFY11fand44%inFY12f.

InitiatewithanADDratingandJun11pricetargetofINR649

Thestockhasseenasharpreratingonthebackofstrongearningsgrowth.We

believe current valuations are likely to sustain, given higher earnings growth

and leadership in categories such as artificial sweeteners. We have used the

averagePEGof0.62 forthepastsixmonthsandtheearningsCAGRof41.3%

duringFY10FY12ftoarriveatourtargetP/Eof25.6x.Basedontheoneyea

forwardrollingEPSofINR25.3(75%ofFY12fEPSofINR23.9and25%ofFY13

EPSofINR29.7)andthetargetP/E,wearriveatourJun11targetofINR649,ata

14%upside.Atourtargetprice,therollingPEGwouldbe0.68,lowerthanthe

currentrollingPEGof0.72.WeinitiatecoveragewithanAddrating.

LastPrice

(INR)

571.4

Bloomberg code

Reuterscode

Avg.Vol.(3m)

Avg.Val.(3m)(INRmn)

52wkH/L(INR)

Sensex

MCAP(INRbn/USDmn)

Shareholding(%) 03/10 06/10

Promoters

MFs,FIs,Banks

FIIs

Public

Others

StockChart(RelativetoSensex)

StockPerfm.(%) 1m 6m 1yr

Absolute

Rel.toSensex

Financials(INRmn) 03/10 03/11f 03/12f

Sales

yoy(%)

EBITDA(%)

A.PAT

Sho/s(diluted)

A.EPS(INR)

yoy(%)

D/E(x)

P/E(x)

EV/E(x)

RoCE(%)

RoE(%)

QuarterlyTrends 09/09 12/09 03/10 06/10

Sales(INRmn)

PAT(INRmn)

0.5

11.8

4,2493,400

16.6

174

874

15.3

79.9

15.8

0.4

11.3

72.5 72.5

18,220

22.32/481

2,681

379.7

358.3

18.4

16.2

97.7

83.3

76

39

50

52

637

39

23.9

44

23.7

26

934

1.1

39

1.1

25

25

648

27

18.1

38

25

467

1.2

39

12.0

84

99

649

47.4

31.2

55

55

143

754

ZYWLIN

ZYSY.BO

160,656

579/115

23.8

53

52

34.2

0

150

300

450

600

Aug09 Dec09 Mar10 Jul10Zydus wellness Sensex Rebased

YasminRShah,+9102266842855

[email protected]

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India Equit y Research ZydusWellness

FMCG

2

InvestmentSummary

TheoutperformanceofZydusWellnessanditspremiumvaluationderivesstrongsupportfromthescaleandqualityof

growth of its businesses. Demand for wellness products can continue to grow considerably faster than the broader

FMCGmarket,drivenbylifestylechangesthatareleadingtohealthailments.Risingincomesandawarenessoftherisks

is leading the population in the age bracket of 25 to 50 to respond by consuming safer alternatives to regular food

products.ZYWLispresentintwo artificialsweetenersandmargarine ofthesecategoriesthroughthebrandsSugar

Free and Nutralite. Their reach is being extended through brand extensions. The steep growth in the population of

diabetics in Indiapresentsahugeopportunity.Weforecastthemarketforsweetenerstomorethandouble inthree

years, driven by increased diagnosis and deeper penetration in the diagnosed population. ZYWLs revenue and net

profitsareforecasttogrowatathreeyearCAGRof25%and35%,respectively.Thoughthestockappearsnearthetop

endamongpeers ifmeasuredonP/E, it isclosetothebottomonPEG.ThehighergrowthofZYWLdeservesahigher

valuationfortheforecastperiod.WeassignatargetP/Eof25.6x(arrivedfromthemeanPEGforthepastsixmonths)

andarriveataJun11targetpriceofINR649,whichimpliesa14%upside.WeinitiatecoveragewithanAddrating.

NicheplayonthecINR114bnwellnesscategory

ZydusWellness(ZYWL)isanicheplayerinthehealthandwellnessspacewithaCAGRof84%insales,

includingacquisitions,

during

FY07

FY10.

We

estimate

the

market

for

health

and

wellness

products

in

India to be worth INR113.6bn; it is likely to grow at 15% to 20% per annum. With 50% of the

population in the 2550 years age group, India is one of the largest markets for wellness products.

According to a study by Tata Strategic Management, the market for health and wellness food &

beveragesisestimatedatINR101.5bnin2010,whichislikelytogrowtoINR355bnby2015.ZWYLhasa

presence in these categories through products such as Sugar Free, which has 82% market share in

artificial sweeteners, and Nutralite, which has a market share of 65% in spreads. Combined, these

productsaccountfor76%ofsales.

Increasinghealthailmentstodrivedemandforwellnessproducts

At50.8mn,IndiahadoneofthelargestdiabeticpopulationsinFY10.However,only2.96mnconsume

artificialsweetenersbecauseofthelowdiagnosticrateandlowerusagerate.Withanimprovementin

healthawareness,

both

the

diagnostic

and

usage

rates

are

likely

to

improve,

resulting

in

an

increase

in

thetotalnumberofdiabeticsconsumingartificialsweetenersto9.6mn inFY15f.This impliesthatthe

marketsizeofartificialsweeteners is likely increasetoINR2.7bn inFY13fupfromINR1.25bn inFY10.

SalesofSugarFree(shareof65%intablesweetenersand17%inbaking)arelikelytogrowataCAGR

of29%duringFY10FY13ftoreachINR2.2bn.

Sikkimunittodriveprofitability

ZYWL issettingupafacility inSikkimtomanufactureSugarFreeandEverYuth.Thefacility islikelyto

costINR350mnandwouldbeoperationalin2HFY11f.Thecapacitywouldbeabletomeetdemandfor

thenextfiveyears.Theplantislikelytohaveincometaxbenefitstill2017.Thisislikelytoreducethe

effectivetaxrateforZYWLfrom34.6%inFY10to19.0%inFY12fandleadtotaxsavingsofINR55mnin

FY11fand INR181mn(aftertakingMAT intoconsideration) inFY12f.Asaresult,theprofit is likelyto

growby

39%

in

FY11f

and

44%

in

FY12f.

Productconcentrationandrawmaterialcostincreasesareconcerns

ZYWLderives76%of itssalesfromtwobrands:SugarFreeandNutralite.Highproductconcentration

and thegrowthopportunity inbothcategoriesare likely todrawcompetition. IncaseofSugarFree,

whichcontributes40%ofsales,thenewrangeofherbalsweetenersusingthesteviaplantcouldposea

bigthreattoartificialsweetenersbasedonaspartameandsucralose.Ifapproved,theycouldcapture

50% of the market. Another risk is the price of key raw materials such as aspartame. Unlike other

FMCGproducts,thecompanydoesnotundertakefrequentpricechanges inSugarFreeas it looksto

growthemarket.Thisislikelytoputpressureonmargins.

ZYWLis

a

niche

play

on

theINR101.5bnmarket

forhealthandwellness

food&beverages,which

islikelytogrowto

INR355bnby2015.

SugarFreesalestogrow

ataCAGRof29%during

FY10FY13f

on

the

back

of

anincreaseindiabetics

consumingartificial

sweeteners.

Profitlikelytogrowby

39%inFY11fand44%in

FY12fonthebackof

incometaxbenefits.

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FMCG

3

CAGRof25%insalesand35%inprofitsduringFY10FY13f

WeestimateaCAGRof25% inoverallsalesduringFY10FY13f,drivenbyaCAGRof22% inNutralite,

22%inEverYuthand29%inSugarFree.WeforecastaCAGRof26%inEBIDTAduringFY10FY13onthe

backofsalesgrowth,ratherthanan improvement inmargins,asadvertisingexpensesareunlikelyto

decline substantially. We estimate a PAT CAGR of 35%, driven by EBIDTA growth and a reduction in

effectivetaxesaftercommissioningofthenewunitatSikkim.

InitiatewithanAddratingandJun11pricetargetofINR649

Thestrongrallyoverthepast6monthshasliftedthevaluationofZYWLclosetothetopoftheFMCG

universe,ifmeasuredonthemetricsofP/EandMcap/sales.Thevaluationderivesstrongsupportfrom

the 35% CAGR in net profits till Mar13f, which is driven by the large opportunity in the sweetener

market,whereZYWLenjoysleadership,andinothersegmentsofthewellnessmarket.However,ZYWL

has the lowest PEG at 0.83 (see Exhibit 20). At 41.3%, its earnings CAGR for the two years ending

Mar12isforecasttobeclosetotwicethemeanfortheotherstocksinthatgroup.

ThehighergrowthofZYWLdeservesahighervaluationfortheforecastperiod.WehaveusedthePEG

toarriveatthetargetP/E.TheaveragePEGduringthepastsixmonthshasbeen0.62.GiventheCAGR

of41.3% inearningsduring FY10FY12f,we arriveatour targetP/E of25.6x. Basedon the oneyear

forwardrolling

EPS

of

INR25.3

(75%

of

FY12f

EPS

of

INR23.9

and

25%

of

FY13f

EPS

of

INR29.7)

and

a

targetP/Eof25.6x,wearriveatafairvalueofINR649.

TheassignedtargetP/Eof25.6xishigherthanthatforEmami(HMNIN,Hold)andforDabur(DABUR

IN,Hold).ThetargetP/Eforthesestockswassetat23xand25.2x;theirearningsCAGRisforecastat

23%and18.5%,respectively,duringFY10FY13f.Further,atourtargetprice,thePEGwouldbelower,

at 0.68, than the current rolling PEG of 0.72. The Jun11 target of INR649 implies a 14% potential

upside.WeinitiatecoveragewithanAddrating.

Exhibit1:ForwardP/Echart

25.6

0

6

12

18

24

30

Ma r06 Oct06 Apr07 Oct07 Apr08 Nov08 Ma y09 Nov09 Ma y10 Dec10 Jun11

Source:AvendusResearch

Exhibit2:Valuationsummary(INRmn) NetSales EBITDA NetProfit EPS(INR) P/E(x) EV/EBITDA(x) EV/Sales(x) P/B(x)

Mar09 1,947 387 254 6.5 87.1 55.7 11.1 32.1

Mar10 2,681 672 467 12.0 47.4 31.2 7.8 22.0

Mar11f 3,400 866 648 16.6 34.2 23.8 6.1 15.1

Mar12f 4,249 1,090 934 23.9 23.7 18.1 4.7 10.4

Mar13f 5,185 1,344 1,159 29.7 19.1 14.0 3.6 3.6


WeestimateaPATCAGR

of35%,drivenbyEBIDTA

growthandareductionin

effectivetaxes.

ZYWLhasthelowestPEG

at0.83,despitehigherP/E

andMcap/salesratiosin

theFMCGuniverse.

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FMCG

4

TableofContents

InvestmentSummary ........................................................................................................................ 2NicheplayonthecINR114bnwellnesscategory...................................................................................2Increasinghealthailmentstodrivedemandforwellnessproducts......................................................2Sikkim

unit

to

drive

profitability............................................................................................................2

Productconcentrationandrawmaterialcostincreasesareconcerns .................................................2CAGRof25%insalesand35%inprofitsduringFY10FY13f.................................................................3InitiatewithanAddratingandJun11pricetargetofINR649 ...............................................................3

NicheplayonthecINR114bnwellnesscategory............................................................................... 5SugarFreelikelytorideonrisingnumberofdiabetics .........................................................................5ExponentialgrowthopportunitiesinSugarFree...................................................................................5Nutralitesaleslikelytobedrivenbydemandforhealthfood ..............................................................8Carvinganicheinskincare ....................................................................................................................9

Newcategories,brandextensions,newunitlikelytodrivegrowth ............................................... 10Tappingintothedrinksmarket ...........................................................................................................10ForayintoMenz;anINR5bncategory.................................................................................................10Sikkim

unit

and

backward

area

benefits

likely

to

drive

profitability ...................................................11

Productconcentrationandrawmaterialcostincreasesareconcerns ........................................... 12Herbalsweetenerscouldeatintothemarket.....................................................................................12Higherdependenceontwoproducts..................................................................................................12Increasedrisksofcompetitionenteringthesegments .......................................................................12Riseinkeyrawmaterialpriceslikelytoimpactrevenues...................................................................13

CAGRof25%insalesand35%inprofitsduringFY10FY13f ........................................................... 14CAGRof25%insalesongrowthinexistingproducts .........................................................................14EBIDTACAGRof26%duringFY10FY13f .............................................................................................14Profitgrowthlikelytobedrivenbylowertaxrates ............................................................................14LikelytoreadyawarchestofINR3.2bninFY13f ................................................................................14

Initiatewith

Add

and

aJun11

target

of

INR649,

upside

of

14%...................................................... 15Substantialexpansioninmultiples......................................................................................................15

InitiatewithJun11targetpriceofINR649;upsideof14% ..................................................................16Aboutthecompany ......................................................................................................................... 18Financials&Valuations ................................................................................................................... 19

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FMCG

5

NicheplayonthecINR114bnwellnesscategory

ZydusWellnessisanicheplayerinthehealthandwellnessspacewithaCAGRof84%insales, includingacquisitions,

duringFY07FY10.WeestimatethemarketforhealthandwellnessproductsinIndiatobeworthINR113.6bn;itislikely

togrowat15%to20%perannum.With50%ofthepopulationinthe2550yearsagegroup,Indiaisoneofthelargest

marketsforwellnessproducts.AccordingtoastudybyTataStrategicManagement,themarketforhealthandwellness

food & beverages is estimated at INR101.5bn in 2010, which is likely to grow to INR355bn by 2015. ZWYL has a

presenceinthesecategoriesthroughproductssuchasSugarFree,whichhas82%marketshareinartificialsweeteners,

andNutralite,whichhasamarketshareof65%inspreads.Combined,theseproductsaccountfor76%ofsales.

Exhibit3:Indianmarketforhealthandwellnessproducts(INRbn)Category Categorysize Growthrate Wellnessgroup Marketsize Growthrates Players

Beverages 68* 8%10% Fruitjuices, 12 25% Dabur,Pepsi,

EnergyDrinks 5.5 20% Dabur,Heinz

Snacks 67** 20% Healthsnacks,energybars 3.3 Pepsi,Parle,Marico,ITC,RuchiSoya

EdibleOils 86* 10%12% Safflower 17.2 10%12% Marico,ConAgra

OliveOils 3 20%

Butter 8 10%15% Margarine 1.3 20% ZydusWellness,Amul

Sugar

575

n.a.

SugarFree

1.3 25% Zydus

Wellness,

Wipro,

Milk 236 8%10% SlimMilk 22 15%20% Nestle,MotherDairy,Amul

Maltedhealthdrinks 30 12%15% GSKConsumer,Cadbury's

Icecreams 20 12% Lowfaticecreams 1 Amul,Nirula

Cheese 2.2 1015%

Yogurt 5.8 Yoghurtdrinks 2 Amul,Nestle

Skincare 25 12%15% Ayurvedicproducts 2 15% Ayur,Vicco,Dabur,Biotique,ShahnaazHussein

Toothpaste 25 12%15% Ayurvedictoothpaste 3 12%15% AmarRemedies,Dabur

Shampoos 19.2 8%10% Herbalshampoos 3.5 10%15% Dabur,Biotique,CavinKare

Gums 10 20% Sugarfreegums 0.07 20% Wrigleys

Alcohol 90 12%15% Wine,dietWhisky,dietVodka 7 28%

Total 1,016.20 113.61


SugarFreelikelytorideonrisingnumberofdiabetics

Indiaisoneofthelargestmarketsforwellnessproducts,with50%ofthepopulationinthe2550years

age group. According to a study by Tata Strategic Management, the market for health and wellness

food&beveragesisestimatedatINR101.5bnin2010,whichislikelytogrowtoINR355bnby2015.To

tap into this opportunity, the company has products such as Sugar Free (artificial sweetener and

Nutralite(tablemargarine).Combined,theseproductsaccountfor76%ofsales.

Sugar Free is a category leader in artificial sweeteners with a market share of 82%. ZYWL has a

presence in the artificial sweeteners market through two variants: Sugar Free Gold and Sugar Free

Natura. Sugar Free Gold is targeted at diabetics, while Sugar Free Natura is targeted at the health

consciousconsumer.

ExponentialgrowthopportunitiesinSugarFree

The change in lifestyles has led to a rise in lifestyle diseases such as diabetes. In FY10, there were

50.8mndiabeticsinthecountry.Thenumberofdiabeticshasbeengrowingat5.9%perannumduring

thepast10years.Webelievethegrowthrateislikelytoaccelerateto7.15%toreach71.7mndiabetics

by FY15f. Based on the estimated growth in the number of diabetics, the demand for Sugar Free is

likelytorisesubstantiallyduringthenextfewyears.

Themarketforartificial

sweetenershasbeen

valuedatINR1.25bn.

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FMCG

6

Exhibit4:MarketdataforartificialsweetenersinIndiaMar07 Mar08 Mar09 Mar10 Mar11 Mar12 Mar13 Mar14 Mar15

Population 1,152 1,169 1,187 1,205 1,223 1,241 1,259 1,276 1,293

Urban 341 348 356 363 370 378 385 393 401

Rural 811 821 831 842 853 863 874 883 892

Diabetics

43.8

46.0 48.4 50.8 54.8 58.9

63.1

67.4 71.7

Urban 23.0 24.4 25.8 27 29 31 32 34 36

Rural 20.8 21.7 22.6 24 26 28 31 33 36

Incidence 3.8% 3.9% 4.1% 4.2% 4.5% 4.7% 5.0% 5.3% 5.5%

Urban 6.8% 7.0% 7.3 7.5% 7.8% 8.1% 8.4% 8.7% 9.0%

Rural 2.6% 2.6% 2.7% 2.8% 3.0% 3.3% 3.5% 3.8% 4.0%

Diagnosisrate 57.5% 58.6% 59.7% 60.7% 61.5% 62.4% 63.3% 64.1% 65.1%

Urban 67.0% 68.0% 69.0 70.0% 71.0% 72.0% 73.0% 74.0% 75.0%

Rural 47.0% 48.0% 49.0 50.0% 51.0% 52.0% 53.0% 54.0% 55.0%

Diagnoseddiabetics 25.2 27.0 28.9 30.8 33.7 36.8 39.9 43.2 46.7

Urban 15.4 16.6 17.8 19.1 20.5 22.0 23.6 25.3 27.0

Rural 9.8 10.4 11.1 11.8 13.2 14.7 16.3 17.9 19.6

Marketsizeforsweeteners(INRmn) 730 886 979 1,252 1,688 2,183 2,741 3,366 4,058

SugarFreepelletsales(INRmn) 438 542 612 814 1,097 1,419 1,782 2,188 2,638

MarketshareofSugarFree 60% 61% 63% 65% 65% 65% 65% 65% 65%

Consumersofartificialsweeteners(mn) 1.72 2.09 2.31 2.96 3.99 5.15 6.47 7.95 9.58

Incrementalusage 20.5% 11.7% 32.6% 35.6% 38.6% 41.6% 44.6% 47.6%

Growth

Population 1.53% 1.50% 1.53% 1.53% 1.49% 1.47% 1.44% 1.37% 1.29%

Diabetics 5.3% 5.2% 5.1% 5.0% 7.9% 7.5% 7.1% 6.8% 6.4%

Diagnoseddiabetics 7.2% 7.1% 7.0% 6.9% 9.4% 9.0% 8.6% 8.3% 7.9%

Sweetenersales 21.4% 10.6% 27.9% 34.8% 29.3% 25.6% 22.8% 20.6%


LargeuntappedmarketOf the 50.8mn diabetics in the country, 27mn are in urban areas, while the rest are in rural areas.

However,webelieveonly60.7%ofdiabetics have been diagnosed, with theurbandiagnosis rate at

70% against 50% for rural. Hence, there are 30.8mn diagnosed diabetics in the country, of which

19.1mnresideinurbanareas.Webelievethatofthediagnoseddiabeticsnoteveryoneisaconsumer

ofartificialsweeteners;onlyneweradditionsconsumeartificialsweeteners.Thisreducesthepotential

marketsize.

Nevertheless,

even

if

we

consider

the

additions

in

the

past

10

years

(16.15mn,

the

target

marketishuge,giventhatcurrentlyonly2.96mnpeopleconsumeanyartificialsweetener.Consumers

of artificial sweeteners are growing at a CAGR of 20% during FY07FY10f. Assuming that a diabetic

consumesfourpelletsperday(eachpelletisequivalenttoateaspoonofsugar;inallourcalculations,

onlythepelletformofconsumptionisconsidered),thesizeoftheartificialsweetenermarketispegged

atINR1.25bnor0.2%oftotalsugarconsumptioninthecountry.

IncreaseinrateofdiagnosiscancatapultmarketgrowthWebelievethediagnosisrate isoneofthekeyparametersforgrowthofartificialsweeteners in the

country. We have assumed an annual increase of c1% in the diagnosis rate in rural and urban India

Ofthe50.8mndiabeticsin

thecountry,only2.96mn

consumeartificial

sweeteners.

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FMCG

7

duringFY10FY15.However,a1%changeinthediagnosisratecanincreasemarketgrowthto40%from

35%inFY11f.

Exhibit5: SensitivitytodiagnosisrateIncreaseindiagnosisrate,growth

inArtificialsweetenermarket FY11 FY12 FY13 FY14 FY15

Baseassumption,1% 35% 29% 26% 23% 21%

2% 40% 33% 28% 25% 26%

3% 46% 37% 31% 27% 30%


ImprovementinincrementalusagewouldgoalongwayAccording to our estimates, 32.6% (0.65mn people) of the newlydiagnosed diabetics (c2mn people)

consumedartificialsweetenersinFY10.Ifweweretoincreasetheusagerateby1%,thegrowthinthe

artificialsweetenermarketislikelytojumpfrom35%to36%inFY11f.

Exhibit6:SensitivitytoincrementalusageIncreaseinincrementalusage,growth

inArtificialsweetenermarket FY11 FY12 FY13 FY14 FY15

3% 35% 29% 26% 23% 21%

4% 36% 31% 27%

24% 22%

5% 37% 32% 28% 25% 23%


We believe there is huge market potential for artificial sweeteners. The diabetic population is only

likely to increase,given thechanging lifestylesand increasingstress levels.Diagnosticratesarealso

likely to improve, given the increasing awareness and the governments spend on health. Between

FY10andFY15,15.8mnnewlydiagnoseddiabeticsarelikelytobeaddedtothetargetmarket.Ofthis,

we have assumed 6.6mn people to consume artificial sweeteners (assuming consumption of four

pellets per day). Thus, we estimate a market size of INR4.05bn in artificial sweeteners by FY15,

implying a CAGR of 27% during FY10FY15f. We believe there are likely to be more upsides to our

estimatesaswehaveassumedaconstantlevelofpercapitaconsumptionandamoderateriseinthe

diagnosis

rate.

As

explained

above,

the

high

sensitivity

to

the

diagnosis

rate

is

likely

to

pull

up

growth

rates.Lastly,thepriceperpellethasalsobeenconstantatINR0.29visvissugar.Intheeventofan

increaseinprice,marketgrowthislikelytoacceleratefurther.

ExtendingitstargetmarkettonondiabeticsEarlier, the company only targeted diabetics, but in 2002 it extended its target market to health

consciousconsumersthroughthelaunchofSugarFreeNatura.

ThedifferencebetweenSugarFreeGoldandSugarFreeNaturaliesintheirkeyingredients.SugarFree

Goldcontainsaspartame,asweetenermadefromaproteinderivative(acombinationofthreeamino

acids,namelyphenylalanine,asparticacidandmethanol),andis200timessweeterthansugar.Sugar

FreeNaturacontainssucralose,anewgenerationnocaloriesugarsubstitutethatisderivedfromsugar

(orsucrose;technicalnameforsugar)throughamultistepmanufacturingprocess,whichguarantees

itssweetness(600timessweeter)withoutthecalories.

Aspartame is the largest selling sweetener worldwide, while sucralose is the latest entrant in the

internationalmarketand isafavorite intheUS.Leading internationalbodiessuchastheUSFDA,the

WHOandatleast25reputedorganizationshaveapprovedbothsweeteners.

Thereisamarginaldifferenceinthecaloriecontentofthetwovariants:SugarFreeGoldcontains0.4

caloriesperpellet,whileSugarFreeNaturacontainszerocaloriesperpellet.Thus,SugarFreeGoldand

Sugar Free Natura give only 2% and 0%, respectively, of the calories from a teaspoon of sugar (20

calories).

Weestimateamarketsize

ofINR4.05bninartificial

sweetenersbyFY15,

implyingaCAGRof27%

duringFY10FY15f.

Thecompanyhas

extendeditstarget

markettohealth

consciousconsumers

throughthelaunchof

SugarFreeNatura.

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FMCG

8

SugarFreeGoldhasbeenpositionedasatablesweetener,suitedforteaandcoffee;whileSugarFree

Naturahasbeenmarketedasareplacementforjaggeryandsugarincookingandbaking.Accordingly,

thebrand isendorsedbycelebritychefSanjeevKapoor,whileSugarFreeGold isendorsedbyactress

BipashaBasu.SugarFreeNaturaispricedata22%premiumtoSugarFreeGold.

We estimate Sugar Free Gold to have a market share of c65%, while Sugar Free Natura has c17%,

takingthecombinedmarketsharetoc82%oftheartificialsweetenermarket.Nearly99%ofsalesare

throughtheretailsegment.

MaintainingpricesinordertoexpandthemarketTheCAGRfortheSugarFreebrandduringFY07FY10was24%.Growthwasentirelyledbyvolumesas

the last price hike (of 4%) was taken in FY02.As it is a market leader, ZYWL is trying toexpand the

marketbykeepingpricesconstant.Giventhehugepremiumvisvissugar(234%), it is importantto

retainpricesoveralongerperiod.Managementexpectstomaintainthepremiuminthecomingyears.

Despitesuchahighpremium,thecompanyhasbeenabletowardoffcompetitionfromnewentrants

suchasWipro(WPROIN,NR)andolderplayerssuchasMerisant(Equal,marketedbyJLMorrison).We

believeZYWLhascreatedbrandequityovertheyears,whichhasbeenstrengthenedbyastablepricing

strategy;thus,maintainingtheproductsvalueformoneyproposition.

Exhibit7:Pricingofartificialsweeteners(INR)

SugarFreeNatura SugarFreeGold Equal

30pellets 20 58

40pellets 20

100pellets 60 (100+10pellets)55

200pellets 110 138

300pellets 160 (300+30pellets)130

500pellets 175 155

100gmconcentratepowder 110 90

25sachetspack 35 (25+5sachets)35 45

50sachetspack 65 60

100sachetspack 125 95

Source:Avendus

Research

InFY10,salesofSugarFreeGoldwere INR814mn,whilethat forSugarFreeNaturawere INR213mn.

Giventhepotentialsizeofthemarketandthe lowcompetition,weestimateaCAGRof29% insales

duringFY10FY13f.

Nutralitesaleslikelytobedrivenbydemandforhealthfood

TheaffluentlifestyleoftheurbanIndianconsumerhasgivenwaytomanylifestylediseases.According

to the World Health Organisation (WHO) 50mn people suffered fromheart disease in India in 2001.

Thisnumberisestimatedtoriseto100mnin2010.

Theincreasingincidenceofheartproblemsanddiabeteshaspavedthewayforgrowingsalesinhealth

foods. As an alternative to butter, ZYWL offers Nutralite, which is a table margarine that has lesser

cholesteroland

does

not

contain

hydrogenated

fats.

It

also

has

PUFA

(poly

unsaturated

fatty

acids)

and

MUFA(monounsaturatedfattyacids),whichareknowncholesterolfighters.

As part of Carnation Foods in 2006, Nutralite was an INR280mn brand. During FY06FY10, the sale

CAGRforthebrandhasbeen33%.Nutraliteisacategoryleaderwith65%share.Whenthebrandwas

acquired,nearly100%ofthesaleswerethroughinstitutions.Sincethen,ZYWLhasdevelopedtheretail

business, which now accounts for 30% of sales. Due to the heavy competition in the category, the

companyoffersitsinstitutionalcustomersadiscountontheproduct.Fortheretailsegment,however,

pricing is determined by that of butter. ZYWL normally prices the product at a discount of

cINR2/100gm to the price ofbutter. The market is mainly concentrated in the North,East andWest

SugarFreeNaturaisa

replacementforjaggery

andsugartobeusedin

cookingandbaking.

Nutralitewasan

INR280mnbrandin2006.

DuringFY06FY10,sales

hadaCAGRof33%.

Nutraliteisacategory

leaderwith65%share.

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FMCG

10

Newcategories,brandextensions,newunitlikelytodrivegrowth

ZYWLhasnotonlyforayedintonewcategoriessuchasskincareformen,buthasalsoextendeditsSugarFreebrandto

categoriessuchas ready to drink,etc.Though thecontribution from thesebrands isnot meaningfulat present, it is

likelytorise,giventhenascentnatureofthecategory.Inthenearterm,thecompanyislikelytocommissionafacilityin

SikkimtomanufactureSugarFreeandEverYuth.This is likelyto leadtotaxsavingsof INR55mnand INR181mn(after

consideringMAT)inFY11fandFY12f,respectively.Thus,weestimateaCAGRof35%innetprofitsduringFY10FY13f.

Tappingintothedrinksmarket

The Sugar Free brand has been extended to beverages. They are available in the powdered and

readytodrink formatsunder thebrandnameSugarFreeD'Lite.Thedrinksare99%caloriefreeand

arepositionedashealthandsportsdrinks.ThebrandclockedsalesofcINR60mnin2009.Thiscategory

haslowcompetition.

Exhibit10:IndianreadytodrinkmarketSegments Brands/Companies Value(INRbn) Growthrate

Fruitjuices Safal,Real,Tropicana,Njoi,FreshGold 4.8 30%

Nectars 1.2

Fruitbaseddrinks Maaza,Frooti,Slice,Burrst,Appy 6.0 15%20%

Carbonatedsoftdrinks Pepsi,Coke 75.0 5%6%

Water Parle,TataTea,Pepsi,Coke 12.0 10%15%

Total 99.0


ThecompanyisalsotestmarketingSugarFreeIcedTea,whichispricedatINR20/250ml.Theicedtea

marketisnascent,withLipton,NesteaandSnappleasthelargestplayers.Thoughmarketopportunities

are huge, the market for iced tea has not grown as much since most iced tea sales to occur

outofhome,throughvendingmachines.Thisoffersanopportunitytogrowinhouseconsumption.

ForayintoMenz;anINR5bncategory

ZYWLrecently

forayed

into

the

INR5bn

mens

skincare

market

with

the

launch

of

EverYuth

Menz.

The

market for mens skin care is growing at 25% per annum. The company has introduced a

comprehensiverangeofskincareproducts,includingfacewashes,scrubs,sunblocksandmoisturizers.

Theinitialresponsetothelaunchhasbeenlukewarm.

The Indian mens skincare market is facing a habit issue with men using womens products. Lower

indulgencebymenonskincareandwithwomen largelybuyingproductsforthehomearedeterrents

tomarketgrowth.Nevertheless, themarket isgrowingonaccountgreateracceptabilityandproduct

awarenessby theyounger malepopulation. Theentry ofvariousplayers such asNiveaandVaseline

fromHindustanUnilever(HLVRIN,Hold)andFuelforMenfromElderCareduringthepasttwoyearsis

likelytoexpandthemarket.

Accordingtothemanagement,thesegmentisonlylikelytoyieldreturnsduringthenextfivetoseven

years.ZYWL

is

targeting

revenues

of

INR400mn

to

INR500mn

by

then.

We

believe

revenues

from

Menz

arelikelytoexceedmanagementexpectations,giventhenascentmarket.

Exhibit11:SkincareproductsunderEverYuthMenzSegments EverYuth Competingbrands

Facewash OxyActivefacewash,Pollutiondefensefacewash NiveaWhiteningfacewash,Vaselinefacewash

Scrubs Energizingscrubs

Sunblock Sunblocklotion

Lotionsandcreams IntensiveMoisturizer Niveawhiteningmoisturizer,Vaselinelotion


ZYWLhasextendedSugar

Freetopowdereddrinks

andicedteas.

EverYuthhasbeen

extendedtotheINR5bn

mensskincarecategory.

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FMCG

11

Sikkimunitandbackwardareabenefitslikelytodriveprofitability

ZYWL issettingupafacility inSikkimtomanufactureSugarFreeandEverYuth.Thefacility islikelyto

cost INR350mn and would be operational in 2HFY11f. The capacity is likely to meet demand for the

next five years. The plant is likely to have excise and income tax benefits till 2017. This is likely to

reducetheeffectivetaxrateforZYWLfrom34.6%inFY10fto19.0%inFY12fandleadtotaxsavingsof

INR55mninFY11fandINR181mn(aftertakingMATintoconsideration)inFY12f.Thecompanydoesnot

payany

excise

as

its

sources

products

from

manufacturers

in

backwards

areas.

Thus,

we

estimate

a

CAGRof35%innetprofitsduringFY10FY13f.

Exhibit12:TaxsavingsonaccountoftheSikkimfacility(INRmn) FY11f FY12f FY13f FY14f

Sales

SugarFree 1,369 1,759 2,197 2,686

EverYuth 814 993 1,192 1,406

Total 2,184 2,753 3,389 4,093

VolumesfromSikkimfacility 25% 100% 100% 100%

Salesfrom

Sikkim

SugarFree 342 1,759 2,197 2,686

EverYuth 204 993 1,192 1,406

Total 546 2,753 3,389 4,093

EBIDTAMargin(%)

SugarFree 29 29 29 29

EverYuth 38 38 38 39

EBIDTA

SugarFree 99 510 637 779

EverYuth 77 377 453 541

Total

177 888

1,090 1,320

Interest 0 0 0 0

Depreciation 16 16 16 16

PBT(SugarFree,EverYuth) 161 872 1,075 1,305

TaxsavingsbeforeMAT 56 305 376 457

TaxsavingsafterMAT 55 181 225 276


ZYWLislikelytoavailtax

savings(netofMAT)of

INR55mninFY11fand

INR181mninFY12fon

accountoftheSikkimunit.

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FMCG

12

Productconcentrationandrawmaterialcostincreasesareconcerns

ZYWLderives76%ofitssalesfromtwobrands:SugarFreeandNutralite.Highproductconcentrationandthegrowth

opportunityinbothcategoriesarelikelytodrawcompetition.IncaseofSugarFree,whichcontributes40%ofsales,the

new range of herbal sweeteners using the stevia plant could pose a big threat to artificial sweeteners based on

aspartame and sucralose. If approved, they could capture 50% of the market. Another risk is the price of key raw

materialssuchasaspartame.UnlikeotherFMCGproducts,thecompanydoesnotundertakefrequentpricechangesin

SugarFreeasitlookstogrowthemarket.Thisislikelytoputpressureonmargins.

Herbalsweetenerscouldeatintothemarket

Researchers have found that sustained use of aspartamebased products could be harmful in the

longerrun.Thus, therewasaneed foranaturalproductwithnosideeffects.Thesteviaplanthasa

long history of safe usage. It has received government approval in over 20 countries; regulatory

approvalsfortheuseofsteviaandsteviosidesasafoodadditivehavebeenreceivedinJapan,Korea,

China, Taiwan, Australia, Russia, Ukraine, Kazakhstan, Malaysia, Indonesia and Latin America. It is

awaitingapprovalintheUSandCanada.

In the US, the U.S. Food and Drug Administration (FDA) recently approved the use of Truvia and

PureVia,

two

zerocalorie

sweeteners

made

from

the

stevia

plant,

for

use

in

foods

and

beverages.

Thesenewlyapprovedsweetenersarepurifiedformsofstevia.Thus,accordingtotheUSFDA,stevia

itselfcannotbemarketedasasweetener.However,itcanbesoldintheformofTruviaorPurevia,in

whichcasetheUSFDAwillneitherapprovenorobject.

The global market for stevia sweeteners is already worth over USD500mn; Japan is the largest

consumerwithconsumption of USD200mn (in Japan,artificialsweeteners arebanned).According to

marketsurveys,themarketcouldeasilyreachUSD10bnfollowingUSFDAapprovalforuseasadietary

supplement. Currently, it has been approved as a food ingredient (use in large consumer packaged

goods).Thus,steviabasedsweetenersarelikelytocaptureover50%ofthemarketshareofaspartame

and sucralosebased sweeteners. However, before that, three issues need to be dealt with: (1)

improvingsteviastasteprofile;(2)regulations;and(3)sourcingofstevia leavesthough India isthe

secondlargestproducer,SouthAmericaisthepreferreddestinationforsourcing.

Higherdependenceontwoproducts

ZYWLderives76%ofitssalesfromtwobrands:NutraliteandSugarFree.Thedependenceisestimated

toremainatsimilarlevelstillFY13f.Thisislikelytoposeabigriskintheeventofaslowdownineither

brand,impactingoverallsalesgrowth.

Increasedrisksofcompetitionenteringthesegments

ZYWLisamarketleaderinartificialsweeteners(shareof82%)andintablemargarine(shareof65%).

There is a threat of new players entering the market given the strong growth in categories and low

competition.However,webelievethatthecompanyhasastrongbrandfranchiseaseventhoughmany

playershavetriedtoentertheartificialsweetenersmarket,theyhavefailed.IncaseofNutralite,the

institutional

business

is

highly

competitive;

however,

as

ZYWL

is

increasing

the

share

of

its

retail

business,thethreatismitigatedtothatextent.

Herbalsweetenerssuchas

steviacancapture50%of

theaspartameand

sucrolosemarket,once

approvedbytheUSFDA.

With76%ofsalescoming

fromtwoproducts,there

isariskofrevenue

concentration

8/2/2019 ZYWLAV110810

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FMCG

13

Riseinkeyrawmaterialpriceslikelytoimpactrevenues

AspartameandvegetableoilsarethekeyrawmaterialsforZYWL.Thecompanysourcesvegetableoils

domestically from Adani Wilmar, while aspartame is imported. Aspartame prices have not moved

muchduringthepasttwoyears.UnlikeotherFMCGproducts,ZYWLdoesnotundertakefrequentprice

changes inSugarFreeas thecompany is looking togrow themarket. Incase there isasharprise in

prices,itislikelytoputpressureonmargins.

Exhibit13:IndiasimportededibleoilpriceINR/kg

50

75

100

125

150

Feb05 Jan06 Nov06 Oct07 Aug08 Jul09 Jun10


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FMCG

14

CAGRof25%insalesand35%inprofitsduringFY10FY13f

WeestimateaCAGRof25%inoverallsalesduringFY10FY13f,drivenbyaCAGRof22%inNutralite,22%inEverYuth

and29%inSugarFree.WeforecastaCAGRof26%inEBIDTAduringFY10FY13onthebackofsalesgrowth,ratherthan

an improvement in margins, asadvertisingexpenses isunlikely to declinesubstantially.Weestimate a PAT CAGRof

35%,drivenbyEBIDTAgrowthandareductionineffectivetaxesaftercommissioningofthenewunitatSikkim.

CAGRof25%insalesongrowthinexistingproducts

DuringFY07FY10,ZYWLhadaCAGRof84%insales.ThegrowthwasledbyaCAGRof33%insalesof

NutraliteandduetothemergerofSugarFreeandEverYuthinFY09.Weestimatesalestogrowby24%

in FY11f and 23% in FY12f. Sales growth is likely to be driven by growth in existing products. We

estimate a CAGR of 22% in sales of Nutralite, 22% in EverYuth and 29% in Sugar Free during

FY10FY13f.Alargepartofthesalesgrowthislikelytocomefromvolumegrowthasnopricehikesare

likelyinSugarFreeorEverYuth.Webelievetheentryintocategoriessuchasskincareformenislikely

toleadtoasizeableturnoverduringthenextfewyears.

EBIDTACAGRof26%duringFY10FY13f

ZYWLsEBIDTA

margin

expanded

from

9.5%

in

FY07

to

25.1%

in

FY10.

This

was

mainly

on

account

of

the merger of highmargin products such as EverYuth and Sugar Free in FY09. EBIDTA margins in

Nutralitearec11%.BetweenFY09andFY10,marginexpansionwas ledbya320bp improvement in

gross margins. Prices of key raw materials such as vegetable oils and aspartame are estimated to

remainsteady.Further,advertisingasapercentageofsalesisestimatedtodeclinefrom22.7%inFY10

to22%inFY13f.ItisunlikelytoreachthelevelsofotherFMCGplayersasitisfallsonthecompany,as

amarketleader,tocreateawarenessandgrowcategoriessuchasartificialsweetenersandmargarine.

WeestimateEBIDTAmarginstoimproveto25.5%inFY11fand25.6%inFY12f.

Profitgrowthlikelytobedrivenbylowertaxrates

DuringFY07FY10,ZYWLhadaCAGRof167%inprofits.InFY10,thelikeonlikeprofitgrowthwas88%,

driven by a 74% rise in operating profit and higher other income. The company is setting up a new

facility

in

Sikkim

to

manufacture

EverYuth

and

Sugar

Free.

The

facility

is

likely

to

be

operational

in

2HFY11fandwouldbeabletomeetthecompanysrequirementsforthenextthreetofouryears.Itis

likely to have an income tax holiday for 10 years, decreasing the companys effective tax rate from

34.6% inFY10to19.0% inFY12f. It is,however,unlikelyto impactnetsalesgrowthasZYWLalready

availsexcisebenefitsasitsourcesfinishedproductsfrombackwardareas.Asaresult,netprofitislikely

togrowby39%inFY11fand44%inFY12f.

LikelytoreadyawarchestofINR3.2bninFY13f

ZYWLhasplannedacapexofINR450mninFY11f,ofwhichINR350mnislikelytobeusedtosetupthe

Sikkim facility and INR100mn to augment Nutralite capacity at Changodar, Ahmedabad, from

1,400 tonnes/month to 1,800 tonnes/month. The company has not planned any other major capex

afterthis.ThisimpliesthatZYWLislikelytogenerateacashsurplusofINR2.2bninFY12fandINR3.2bn

inFY13f,

after

factoring

in

the

dividends.

However,

this

is

likely

to

depress

the

ROCE.

WeestimateaCAGRof

25%insalesduring

FY10FY13f,helpedby

CAGRof22%inNutralite

and29%inSugarFree.

EBIDTAmargins

are

likely

toexpandby10bpona

marginaldeclineinthe

advertising/salesratio.

Profitislikelytogrowby

39%inFY11fand44%in

FY12fon

lower

tax

rates

duetobackwardarea

benefits.

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FMCG

15

InitiatewithAddandaJun11targetofINR649,upsideof14%

ThestockistradingataP/Eof34.5xFY11fand23.9xFY12f,atthehigherendoftheP/Eband.Ithasseensignificant

reratingduringthepastoneyear,withitsforwardP/Eata67%premiumtothatoftheSensex.Thiswasonthebackof

a sharp improvement in profitability. We believe the current valuations are likely to sustain on account of higher

earningsgrowthandleadershipincategoriessuchasartificialsweeteners.WithapastsixmonthaveragePEGof0.62

andgiventheCAGRof41.3%inearningsduringFY10FY12f;wearriveatourtargetP/Eof25.6x.Basedontheoneyear

forwardrollingEPSofINR25.3(75%ofFY12fEPSofINR23.9and25%ofFY13fEPSofINR29.7)andthetargetP/E,we

arriveataJun11targetofINR649,whichisata14%upside.WeinitiatecoverageonthestockwithanAddrating.

Substantialexpansioninmultiples

ZYWListradingataP/Eof34.5xFY11fand23.9xFY12f.ItistradingataoneyearforwardrollingP/Eof

29.5x. Before the merger of Sugar Free and EverYuth (during Mar05Mar08), the stock traded at an

average oneyear forward rolling P/E of 18.6xthe highest being 37.9x and the lowest 9.1x. After

amalgamationoftheconsumercarebusinessinFY09,thestocktradedatanaverageoneyearforward

rollingP/Eof14xthehighestbeing29.5xandthelowest4.5x.

Exhibit14:OneyearforwardP/Ev/stheSensex

4

10

16

22

28

34

Ma r0 6 Fe b0 7 De c0 7 No v0 8 Oc t0 9 Au g1 0

95

60

25

10

45

80

ZYWL RelativetoSensexP/E(%;RHS)


Exhibit15:OneyearforwardP/Ebands

40

148

256

364

472

580


ZYWL 12x 18x24x 30x


From FY08 till date, the stocks forward P/E has been atadiscount of30% to theSensex. However,

followingarerating,itsP/Eisata67%premiumtotheSensex.Webelievethecurrentvaluationsare

likelytosustainonaccountofanestimatedCAGRof35%inearningsduringFY10FY13f.

Exhibit16:PricerelativetotheFMCGIndex

30

108

186

264

342

420


ZYWL Sensex


Exhibit17:PricerelativetotheSensex

30

108

186

264

342

420

Ma r0 6 Fe b0 7 D ec 07 No v0 8 Oc t0 9 Au g1 0

ZYWL FMCGIndex


ZYWL underperformed the Sensex and the FMCG Index during Mar06Nov09. In case of the FMCG

Index,theunderperformancecontinuedtillMar10.Sincethen, ithassignificantlyoutperformedboth

ZYWLsP/E

premium

vis

vistheSensexhas

expanded.Thesameis

likelytosustain,givenan

earningsCAGRof35%

duringFY10FY13f.

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FMCG

16

indices, mainly on account of the robust growth in profits and the market leadership in nascent

categoriessuchasartificialsweeteners.

Exhibit18:EV/EBIDTA

40

148

256

364

472

580


ZYWL 8x 12x16x 20x


Exhibit19:ForwardMcap/sales

0.5

1.7

2.9

4.1

5.3

6.5



Initiate

with

Jun11

target

price

of

INR649;

upside

of

14%

Since themergerofEverYuthandSugarFree,thestocks lowestoneyearaverageP/Ehasbeen4.5x

and highest has been 29.5x. ZYWL has seen significant rerating during the past one year on strong

earnings growth, with its average oneyear P/E moving to 14x. Currently, in terms of P/E and

Mcap/sales,thestockisoneofthemostexpensivestocksintheFMCGUniverse.However,intermsof

PEG,thestockisthecheapest,givenitsstrongearningsmomentum.

We have valued ZYWL according to the P/E method, given its high earnings growth. We believe the

current valuations are likely to sustain on account of higher earnings growth, the strong growth

opportunityinartificialsweetenersandZYWLsleadershipposition.WehaveusedthePEGtoarriveat

thetargetP/E.TheaveragePEGduringthepastsixmonthshasbeen0.62.GiventheCAGRof41.3%in

earningsduringFY10FY12f,wearriveatourtargetP/Eof25.6x.Basedontheoneyearforwardrolling

EPSofINR25.3(75%ofFY12fEPSofINR23.9and25%ofFY13fEPSofINR29.7)andourtargetP/E,we

arriveataJun11targetpriceofINR649,whichisata14%upside.

TheassignedtargetP/Eof25.6x ishigherthanthatforEmami(HMNIN,Hold)andDabur(DABURIN,

Hold).ThetargetP/Eofthesestockswassetat23xand25.2x;theirearningsCAGRisforecastat23%

and18.5%, respectively,during FY10FY13f.Further,at our target price, thePEGwould be lower,at

0.68,thanthecurrentrollingPEGof0.72.WeinitiatecoverageonthestockwithanAddrating.

Exhibit20:ComparativevaluationsCMP

P/E

Mcap/Sales

EV/EBIDTA

EPS

CAGR

FY10FY12PEG*

INR FY11f FY12f FY13f FY11f FY12f FY13f FY11f FY12f FY13f

Emami 450 28.9 24.4 20.5 5.5 4.7 4.0 24.3 20.2 16.8 24.6 1.17

Dabur(India) 203 30.6 25.1 20.9 4.4 3.6 3.1 24.4 19.7 16.7 18.2 1.68

ZydusWellness 567 34.2 23.7 19.1 6.5 5.2 4.3 23.8 18.1 14.0 41.3 0.83

HindustanUnilever 260 25.8 22.3 19.0 2.9 2.5 2.2 20.1 17.1 14.4 10.5 2.45

ITC 157 25.7 21.5 17.8 5.7 4.8 4.1 17.1 14.2 11.6 17.3 1.48

GodrejConsumerProducts 357 25.4 20.5 16.0 3.5 2.9 3.0 19.0 15.1 15.7 27.9 0.91

Marico 119 24.6 20.3 16.6 2.4 2.1 1.8 16.7 13.8 11.0 20.7 1.19

Source:AvendusResearch,*PEG=(P/EFY11/EPSCAGRFY1012f)

Wehaveassignedatarget

P/Eof25.6Xtoarriveata

fairvalueofINR649,

upsideof14%.

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FMCG

17

Exhibit21:ForwardP/Echart

25.6

0

6

12

18

24

30

Ma r06 Oct06 Apr07 Oct07 Apr08 Nov08 Ma y09 Nov09 Ma y10 Dec10 Jun11


Exhibit22:ForwardPEGchart

0.68

0.00

0.20

0.40

0.60

0.80

Mar07 Dec07 Aug08 May09 Jan10 Sep10 Jun11


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FMCG

18

Aboutthecompany

ZydusWellnessisasubsidiaryofZydusCadilaandcaterstothegrowinghealthandwellnesssegment.

Erstwhile known as Carnation Foods, it was a singleproduct (Nutralite) company. Carnation was

acquired by Cadila Healthcare (CDH IN, NR) in 2006. In 2008, the consumer business was integrated

intoCarnationNutraAnalogueandwasrenamedZydusWellness.Theintegrationhappenedthrougha

shareswap,

whereby

4new

shares

(face

value

of

INR10)

of

ZYWL

were

issued

for

every

15

shares

(face

valueofINR5)held inZydusCadila.Thecompany issued33.5mnnewsharesandcreatedgoodwillof

INR287.6mn.

The product range comprises Sugar Free Gold (leader in artificial sweeteners with market share of

c70%), Sugar Free Natura (a zerocalorie sucralosebased sugar substitute), Sugar Free Dlite

(lowcaloriehealthdrink)and Nutralite (cholesterolfree tablespread). Nutralite has emergedas the

secondlargestbrand inbutterandbuttersubstitutes.ZYWLalsocaterstotheskincaresegmentwith

itsEverYuthandDermacarebrands

The company has a manufacturing facility with a capacity if 1,400 tonnes/month near Changodar,

Ahmedabad,formanufacturingNutralite.Thefacilityisbeingaugmentedto1,800tonnes/monthata

capexofINR100mn.ThecompanyisalsosettingupafacilitytomanufactureEverYuthandSugarFree

inSikkim;

presently,

production

of

both

products

is

outsourced.

Thecompanyhasadirectdistributionreachof0.12mnoutletsandindirectreachof0.45mnto0.5mn

outlets.ZYWLismainlyurbancentricandcatersto850townsthathaveapopulationofover50,000.

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19

Financials&Valuations

Incomestatement(INRmn)Fiscalyearending 03/09 03/10f 03/11f 03/12f 03/13f

Grosssales 1,947 2,681 3,400 4,249 5,185

Less:Exciseduty 0 0 0 0 0

Netsales 1,947 2,681 3,400 4,249 5,185

Otheroperatingincome 0 0 0 0 0

Totaloperatingincome 1,947 2,681 3,400 4,249 5,185

Totaloperatingexpenses 1,560 2,009 2,534 3,159 3,841

Netmaterials 727 862 1,091 1,376 1,695

Otherdirectcosts 72 95 119 145 177

Personnel 78 93 116 143 172

Adspends 436 609 761 936 1,124

Others 0 0 0 0 0

EBITDA 387 672 866 1,090 1,344

Otherincome 11 60 71 100 128

Depreciation 17 16 32 37 42

EBIT 381 715 906 1,153 1,430

Interest 0 0 0 0 0

RecurringPBT 381 715 906 1,153 1,430

Netextraordinaryitems 16 22 0 0 0

PBT (reported) 365 693 906 1,153 1,430

Totaltaxes 127 240 258 219 272

PAT(reported) 238 453 648 934 1,158

Add:Shareofearningsofassociate 0 0 0 0 1

Less:Minorityinterest 0 0 0 0 0

Priorperioditems 0 0 0 0 0

Netincome(reported) 238 453 648 934 1,159

Avendusnetincome 254 467 648 934 1,159

Dividend+Distributiontax 0 0 0 0 0

Sharesoutstanding

(mn) 39 39 39 39 39

Avendusdilutedshares(mn) 39 39 39 39 39

AvendusEPS(INR) 6.5 12.0 16.6 23.9 29.7

Growthratios(%)Totaloperatingincome 245.7 37.7 26.8 25.0 22.0

EBITDA 519.4 73.4 28.9 25.8 23.4

EBIT 437.5 87.6 26.6 27.3 24.1

RecurringPBT 446.5 87.7 26.6 27.3 24.1

Avendusnetincome 464.9 83.8 38.6 44.1 24.2

AvendusEPS 19.4 83.8 38.6 44.1 24.2

Operatingratios(%)EBITDAmargin 19.9 25.1 25.5 25.6 25.9

EBIT

margin 19.6 26.7 26.6 27.1 27.6Netprofitmargin 13.0 17.1 18.7 21.5 21.8

Otherincome/PBT 2.8 8.3 7.9 8.7 8.9

EffectiveTaxrate 34.7 34.7 28.5 19.0 19.0

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20

Balancesheet(INRmn)Fiscalyearending 03/09 03/10f 03/11f 03/12f 03/13f

Equitycapital 391 391 391 391 391

Preferencecapital 0 0 0 0 0

Reservesand

surplus 299 615 1,073 1,733 2,551

Networth 690 1,006 1,464 2,124 2,942

Minorityinterest 0 0 0 0 0

Totaldebt 0 0 0 0 0

Deferredtaxliability 7 2 2 123 271

Totalliabilities 697 1,004 1,462 2,247 3,213

Grossblock 216 259 610 710 810

less:Accumulateddepreciation 48 65 96 133 175

Netblock 168 195 514 577 635

CWIP 0 18 0 0 0

Goodwill 228 228 228 228 228

Investments 0 0 0 0 0

Cash 507 1,005 1,287 2,176 3,242

Inventories 81 129 186 233 284Debtors 62 14 93 116 142

Loansandadvances 87 186 270 338 412

less:Currentliabilities 360 593 885 1,106 1,349

less:Provisions 76 178 231 315 381

Networkingcapital 301 562 720 1,442 2,350

Totalassets 697 1,004 1,462 2,247 3,213

Cashflowstatement(INRmn)Fiscalyearending 03/09 03/10f 03/11f 03/12f 03/13f

Netprofit 238 453 648 934 1,159

Depreciation 17 16 32 37 42

Deferredtax 0 0 0 125 147

Workingcapitalchanges 250 336 208 235 233

Less:Otherincome 11 60 71 100 128

Cashflowfromoperations 495 745 817 1,231 1,453

Capitalexpenditure 16 61 333 100 100

Strategicinvestmentspurchased 0 0 0 0 0

Marketableinvestmentspurchased 0 0 0 0 0

Changeinotherloansandadvances 44 99 84 67 74

Goodwillpaid 228 0 0 0 0

Otherincome 11 60 71 100 128

Cashflowfrominvesting 189 101 346 67 46

Equityraised 55 0 0 0 0

Changeinborrowings 0 0 0 0 0

Dividendspaid(incl.tax) 0 0 0 0 0

Others 253 146 190 274 341

Cashflowfromfinancing 198 146 190 274 341

Netchangeincash 504 498 281 890 1,066

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KeyRatiosFiscalyearending 03/09 03/10f 03/11f 03/12f 03/13f

Valuationratios(x)

P/E(onAvendusEPS) 87.8 47.8 34.5 23.9 19.3

P/E(on

basic,

reported

EPS) 53.5 49.3 34.5 23.9 19.3

P/CEPS 82.3 46.2 32.8 23.0 18.6

P/BV(Adjusted) 48.4 28.7 18.1 11.8 8.2

Dividendyield(%) 0.0 0.0 0.0 0.0 0.0

Marketcap./FCF 43.7 29.1 27.3 18.1 15.4

Marketcap./Sales 11.5 8.3 6.6 5.3 4.3

EV/Sales 11.2 7.9 6.1 4.7 3.7

EV/EBITDA 56.1 31.5 24.0 18.3 14.1

EV/FCF 43.9 30.0 42.9 17.6 14.0

EV/TotalAssets 31.2 21.1 14.2 8.9 5.9

NetCash/Marketcap. 2.7 5.3 7.0 11.3 16.4

Pershareratios(INR)

AvendusEPS 6.5 12.0 16.6 23.9 29.7

EPS(Basic,

reported) 10.7 11.6 16.6 23.9 29.7

CashEPS 6.9 12.4 17.4 24.8 30.7

BookValue(Adjusted) 11.8 19.9 31.6 48.5 69.5

Dividendpershare 0.0 0.0 0.0 0.0 0.0

ROE Decomposition(%)

EBITmargin 19.6 26.7 26.6 27.1 27.6

Assetturnover(x) 4.1 3.2 2.8 2.3 1.9

Interestexpenseratio 0.0 0.0 0.0 0.0 0.0

Taxretentionratio 65.3 65.3 71.5 81.0 81.0

ROA 53.1 55.0 52.6 50.3 42.5

Totalassets/equity(x) 1.0 1.0 1.0 1.0 1.1

ROE 54.4 55.1 52.5 52.1 45.8

Returnratios(%)

EBIT/Capital

Employed 79.6 84.1 73.5 62.1 52.4

ROCE 53.1 55.0 52.6 50.3 42.5

ROIC 113.7 548.9 830.4 756.2 5494.8

FCF/IC 221.2 828.7 620.2 916.0 6414.5

OCF/Sales 26.2 28.6 24.0 29.0 28.0

FCF/Sales 25.4 26.3 14.2 26.6 26.1

Turnoverratios(x)

Grossturnover 9.0 10.3 5.6 6.0 6.4

Netturnover 11.6 13.8 6.6 7.4 8.2

Revenue/IC 8.7 31.5 43.6 34.4 245.8

Inventory/Sales(days) 10.0 14.3 16.9 18.0 18.2

Receivables(days) 6.9 5.1 5.7 9.0 9.1

Payables(days) 98.4 181.5 222.9 238.8 239.4

Workingcapital

cycle

(ex

cash)

(days)

31.4

62.7

78.6

82.0

83.6

Solvencyratios(x)

Grossdebttoequity 0.0 0.0 0.0 0.1 0.1

Netdebttoequity 0.8 1.2 1.1 1.1 1.2

NetdebttoEBITDA 0.0 0.0 0.0 0.0 0.0

InterestCoverage(EBIT/Interest) 1906.3 #DIV/0! #DIV/0! #DIV/0! #DIV/0!

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22

AnalystCertification

I,YasminRShah,PGMBA,researchanalystandauthorofthisreport,herebycertifythatalloftheviewsexpressedinthisdocumentaccuratelyreflectourpersonalviewsabout

the subject company/companies and its or their securities. We further certify that no part of our compensation was, is or will be, directly or indirectly related to specific

recommendations orviewsexpressedinthisdocument.

Disclaimer

ThisdocumenthasbeenpreparedbyAvendusSecuritiesPrivateLimited(Avendus).Thisdocumentismeantfortheuseoftheintendedrecipientonly.Thoughdissemination toall

intendedrecipientsissimultaneous, notallintendedrecipientsmayreceivethisdocumentatthesametime.Thisdocumentisneitheranoffernorsolicitationforanoffertobuy

and/orsellanysecuritiesmentionedhereinand/orofficialconfirmationofanytransaction. Thisdocumentisprovidedforassistanceonlyandisnotintendedtobe,andmustnot

betakenas,thesolebasisforaninvestmentdecision.Theuserassumestheentireriskofanyusemadeofthisinformation. Eachrecipientofthisdocumentshouldmakesuch

investigationashedeemsnecessarytoarriveatanindependentevaluation,includingthemeritsandrisksinvolved,forinvestmentinthesecuritiesreferredtointhisdocument

andshouldconsulthisownadvisorstodeterminethemeritsandrisksofsuchinvestment. Theinvestmentdiscussedorviewsexpressedmaynotbesuitableforallinvestors. This

documenthasbeenpreparedonthebasisofinformationobtainedfrompubliclyavailable,accessibleresources.Avendushasnotindependentlyverifiedalltheinformationgiven

inthisdocument.Accordingly,norepresentationorwarranty,expressorimplied,ismadeastoaccuracy,completeness orfairnessoftheinformationandopinioncontainedinthis

document.The informationgiven inthis document isasofthedateofthisdocumentandtherecan benoassurancethat futureresultsoreventswillbeconsistentwiththis

information.ThoughAvendusendeavourstoupdatetheinformationcontainedhereinonreasonablebasis,Avendus,itsassociatecompanies,theirdirectors,employees, agentsor

representatives(Avendusanditsaffiliates)areundernoobligationtoupdateorkeeptheinformationcurrent.Also,theremayberegulatory,complianceorotherreasonsthat

maypreventusfromdoingso.Avendusanditsaffiliatesexpresslydisclaimanyandallliabilitiesthatmayarisefrominformation, errororomissioninthisconnection. Avendusand

itsaffiliatesshallnotbeliableforanydamageswhetherdirect,indirect,specialorconsequential, includinglostrevenueorlostprofits,whichmayarisefromorinconnectionwith

theuseofthisdocument.Thisdocument isstrictlyconfidential andisbeingfurnishedtoyousolelyforyourinformation. Thisdocumentand/oranyportionthereofmaynotbe

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anypersonorentitywho isacitizenorresidentoftheUnitedStatesorCanadaor is located inanyother locality,state,countryorotherjurisdiction, wheresuchdistribution,

publication, availabilityorusewouldbecontrarytolaworregulationorwhichwouldsubjectAvendusanditsaffiliatestoanyregistrationorlicensingrequirementswithinsuch

jurisdiction.Personsinwhosepossessionthisdocumentcomesshouldinformthemselves aboutandobserveanysuchrestrictions.Avendusanditsassociatecompaniesmaybe

performingorseekingtoperforminvestmentbankingandotherservicesforanycompanyreferredtointhisdocument.AffiliatesofAvendusmayhaveissuedotherreportsthat

areinconsistent withandreachadifferentconclusionfromtheinformationpresentedinthisdocument.

Avendusgenerallyprohibits itsanalystsandpersonsreportingtoanalystsfrommaintaining afinancial interest inthesecuritiesorderivativesofanycompanythattheanalysts

cover.Avendusanditsaffiliatesmayhaveinterest/positions, financialorotherwise,inthecompaniesmentionedinthisdocument.Inordertoprovidecompletetransparency to

ourclients,wehave incorporateda Disclosureof InterestStatement inthisdocument.Thisshould,however,notbetreatedasanendorsementoftheviewexpressed inthe

document.

Avendus

is

committed

to

providing

high

quality,

objective

and

unbiased

research

to

our

investors.

To

this

end,

we

have

policies

in

place

to

identify,

consider

and

managepotentialconflictsofinterestandprotecttheintegrityofourrelationshipswith investingandcorporateclients.Employeecompliancewiththesepoliciesismandatory.

AnycommentorstatementmadehereinaresolelythoseoftheanalystanddonotnecessarilyreflectthoseofAvendus.

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DisclosureofInterestStatement(asofAugust10,2010)

Analystownership

ofthestock

Avendusoritsassociate

companysownershipofthe

stock

Brokingrelationshipwith

AvendusSecurities

InvestmentBanking

mandatewithassociate

companiesofAvendus

CadilaHealthcare No No No No

Dabur No No No No

Emami No No No YES

HindustanUnilever No No No No

ITC No No No No

Wipro No No No No

ZydusWellness No No No No

OUROFFICES

Corporateoffice InstitutionalBroking Bangalore NorthAmerica

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