Zydus Wellness Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Summer brands staged a strong comeback: Glucon-D and Nycil delivered double-digit growth on a normal summer, recovering to pre-Covid value levels, while Glucon-D crossed 60% market share for the first time in years.
• Gross margin improved sequentially but inflation still bites: Gross margin rose 352 bps QoQ on price hikes and cost measures, yet dipped 70 bps YoY; management believes peak inflation is behind, though milk remains a pressure point.
• Complan is the portfolio’s open wound: The health food drinks category is declining, and Complan lost 80 bps of market share as the company was slow to respond to a down-trading shift toward low-priced pouches and sachets, a segment it entered reluctantly due to margin pressure.
• The margin target is on hold: Management walked back its original 20% operating margin ambition, citing an industry-wide 3–4 percentage point EBITDA margin loss, and will only commit to sequential improvement if the environment stabilizes.
• What to watch next quarter: Whether Complan’s pouch pack national scale-up and chocolate variant launch can arrest the market share slide, the trajectory of palm oil and packing material costs, and any demand recovery after what management expects could be “another quarter of pain.”

Summer Portfolio: The Re-recruitment Payoff

• Glucon-D resurgence: Double-digit growth was driven by a normal quarter with timely summer arrival, strong distribution, and marketing efforts that re-recruited consumers after two consecutive pandemic-hit summer seasons.
• Demand shift to on-the-go: Market demand was led by on-the-go consumers opening up, a cohort absent during the last two summers, supported by Pankaj Tripathi as brand endorser with creative campaigns expanding the use-case from sun/summer heat to general tiredness and exhaustion.
• Nycil strong comeback: Good onset of summer, aggressive TV campaigns, and on-ground activations drove growth; the campaign focused on clinically proven efficacy and enabling kids to go outdoors post-Covid with confidence to overcome prickly heat.
• Re-recruitment mechanics: The average household buys 1.5 packs per season and then exits the category, requiring annual re-recruitment; the company used three levers: brand ambassador campaigns, strong local activation in the Hindi heartland (UP, Bihar), and direct distribution expansion over the last couple of years.
• Recovery benchmark: In value terms, both Glucon-D and Nycil have recovered to pre-Covid levels, with some value loss in translation due to pricing; full penetration data is expected by the end of the quarter.
• Glucon-D 20-gram sachet pilot: Launched as a pilot in select cities, supported through a digital campaign, targeting new consumption occasions.
• Pricing timing advantage: For Glucon-D and Nycil, 85–90% of business is sold between Q4 and Q1, so price hikes must be taken pre-season; the company took them at the right time, with a price increase already effective in Q4 and fully implemented.

Complan: A Reluctant Combatant in a Price War

• Category in decline: The health food drinks category has been declining over the last six months, with the last three months showing a 4% category decline; sachets have not been able to ignite category growth that one would have liked to see.
• Market share erosion: Complan’s market share declined from 5.6% to 4.8%, with structural shifts in the category led by larger players; the company is holding share reasonably well in large packs in the kids category, but growth is coming only from sachets while large packs are declining.
• Slow to the down-trading fight: The company was slow to respond to low-priced pouches and sachets, describing itself as a “reluctant participant because of the margin”; leader brands are actually reducing price, which management called “contrary to all logical thinking,” forcing a defensive strategy.
• Pouch pack response: A 450-gram pouch pack was launched in West Bengal in Q4 and received a fairly decent response; it is now scaling to national level, with a pouch pack in the main chocolate variant planned for launch this quarter to help compete better.
• Adjacency bets: Complan Nutrigro was launched in the toddler segment (2–6 years, ~10–11% of the HFD market) and is being medically detailed through the pharmaceutical side of the business; the company targets a 6–8% share in this space over the next couple of years.
• Larger nutrition ambition: Management is confident of having a larger nutrition play over the next 2–3 years, holding share in the medium term while building by participating in other spaces where Complan has traditionally not played.

Tarun Arora: “The shift that we have been slow to respond to has been the low-priced pouches, which is almost like a price war and the sachets where we have been a reluctant participant because of the margin.”

Rest-of-Portfolio Performance

• Everyuth adjacency build: Single-minded focus on category development within existing spaces (scrub, peel-off); adjacencies being built in tan removal, body lotions, and aloe vera gel; smaller segments like sheet masks, BB cream, CC cream are being evaluated for online-only play because their prize size is much smaller versus current momentum.
• Sugar Free Green opportunity: The natural substitute positioning of Sugar Free Green is expected to create a great opportunity for the brand to significantly grow because it will remove many unwanted issues that people feel with substitutes.
• Non-seasonal revenue build: Specific strategies to build growth in Q2 and Q3 include Nutralite DoodhShakti, Everyuth body lotions, Complan and Sugar Free agendas, and the Sugar Free Green growth agenda.

Margins & Cost Structure

• Gross margin walk: Improved 352 bps sequentially on price increases, cost improvement measures, and product mix, but dipped 70 bps YoY on inflationary pressure.
• Inflation trajectory: Green shoots emerged on palm oil and packing material prices towards the end of Q1; management is “quite hopeful that the peak inflation is behind us,” though milk remains the one product still seeing pressure; if the environment holds, margins will get better at least sequentially.
• Operating margin ambition on hold: The original 20% operating margin target is uncertain (“I am not sure if we get there”); management noted the FMCG industry has lost 3–4 percentage points in EBITDA margins, and Zydus Wellness has done reasonably well to hold on to or almost hold on to its operating margin.
• Employee cost inflection: The substantial cost takeout phase is ending; from now on, increases are expected to be market-aligned plus a small percentage for expansion; operating leverage is expected if double-digit growth continues.
• Sitarganj plant cessation: Operations ceased as part of Transformation 2.0’s objective of leaner operations closer to consumers; a one-off expenditure of ₹2.9 crore was incurred; current and recurring savings will more than outweigh some more one-off expenses in coming quarters.
• Tax rate: No change expected from the Sitarganj cessation since the plant was already under normal tax design; taxable income guidance for FY24–25 continues.
• Pricing stance: At current prices, no specific price interventions are planned; the fundamental strategy is to grow by volume, not by price, because Indian consumers are price-conscious.

Tarun Arora: “I had original 20%. I am not sure if we get there, but we are certainly hopeful of improvement of our operating margins if the environment stabilizes.”

Demand Environment & Distribution

• Consumer demand under pressure: Demand has been under pressure over the last couple of quarters; investments in brand building and distribution expansion helped overcome some challenges.
• Near-term outlook cautious: Management expects the environment to “stay a little bit sluggish,” with maybe “another quarter of pain from an overall demand perspective”; category-to-category performance will play out differently.
• Monsoon as a tailwind: With a normal monsoon in most parts of the country, management is hopeful the demand situation may improve, and will strive to support it through brand-led marketing initiatives, increased distribution reach, and product innovation.
• Rural growth: Glucon-D and Nycil have reasonable presence in rural markets; rural growth is reasonably good as reported by Nielsen; distribution is ramping up.
• Overall availability: Crossed 0.25 crore stores, with an equal split between urban and rural distribution.
• Distribution ROI questioned: An analyst asked whether direct distribution expansion still makes sense given that the pre-demonetization thumb rule (10% distribution increase → 3% sales increase) no longer holds and B2B platforms are doing the same job. Management acknowledged the 10:3 relationship “certainly is not the existing,” but argued direct distribution is still needed for clutter-breaking, new product push, and wholesale limitations, without providing a quantified current ROI metric.

Tarun Arora: “I think the environment will stay a little bit sluggish market in my perspective, but category-to-category it will play out differently.”

Strategic Priorities & Capital Allocation

• Portfolio strategy: The growth story must be driven by brands where the company is a strong market leader and sees opportunity for profitable growth; Complan will be managed defensively to maintain or protect share while adjacencies are built.
• M&A stance evolved: The company is looking at bolt-on acquisitions that fill gaps within its current five broad spaces; deals need not be large but not too small; the role of acquisitions has “substantially changed” from four to five years ago when scaling up via acquisition was a need.
• International ambitions: The company is also looking at international markets (top 5, 6, 8 markets) to move faster; Bangladesh has strong plans.
• Advertising allocation: Glucon-D and Nycil are advertised mostly in peak season; Everyuth scrub, Sugar Free Green, and Complan have more consistent four-quarter advertising; Nutralite spends the lowest due to larger institutional exposure.
• New product focus: The company wants to strengthen body lotions, Nutralite DoodhShakti, and Sugar Free Green to build them up to a sizable level; Sugarlite also has opportunity to continue building.

Sharvil Patel: “I think the story for the organization has to be driven by the other brands where we are strong market leaders and where we see great opportunity in terms of also growth it can lead to profitable growth.”

Guidance & Commitments

Key Metrics