Zydus Wellness Ltd Q3 FY2023 Concall Summary

Key Takeaways

• A quarter of two halves: The seasonal portfolio underperformed (flat volume, muted Glucon-D), while the base business showed resilience with Complan returning to low single-digit growth and Sugar Free posting a 10% revival.
• Price-led margin defence underway: A 6.5% portfolio-wide price increase was taken by quarter-end, aimed at recouping the 270–300 bps gross margin loss absorbed over nine months.
• Complan is stabilising, not yet growing: The brand returned to internal growth even as the health food drinks category continued to degrow; management’s strategy is to hold share conservatively rather than chase aggressive volume in a negative category.
• The 20%+ EBITDA margin ambition is a multi-year journey: Management explicitly stated it will take at least a couple of years to reach the long-term target, citing steep inflation that hurts both cost structures and the demand needed for operating leverage.
• What to watch next quarter: The flow-through of the 6.5% price hike into gross margins, whether Sugar Free’s consumer-led recovery sustains, and any demand green shoots materialising into volume growth as the seasonal portfolio kicks in.

Portfolio Performance: Hits, Misses & Turnarounds

• Complan: Registered low single-digit growth for the quarter despite the health food drinks category continuing to degrow at a MAT level. The intensity of market share loss has come down significantly, with month-to-month share increasing over the last five months.
• Complan strategy: Management will play for hold and grow other market shares rather than an aggressive game in the current negative category environment. Low unit price packs, the only source of category growth, will be used only as a defence given lower profit pools.
• Sugar Free: Posted a 10% revival in offtake, indicating a consumer-level turnaround. Recovery was largely led by Sugar Free Green, with recruitment of new consumers reported by household panel data and optic growth through Nielsen.
• Glucon-D: Q3 is a nonseasonal quarter with limited contribution. Investments in building a second season did not yield the expected lift; numbers were muted and lower than expected. Management called it a long haul, not a one-season play.
• Everyuth: Continued consistent double-digit growth on a three-year CAGR basis, building market share over the last five to six quarters by growing the category as the largest player in this segment.
• Nutralite: Delivered double-digit growth in both retail and professional segments. The Sampriti sub-brand was converged under the Nutralite umbrella, making it larger and more meaningful.
• Immunovolt: Market share in glucose tablets moved from single digits to 20%, 25%, 26%. The task now is to build the category itself, described as a medium-term haul.
• Nycil Mist: Launched during the COVID season and faced challenges; the product is being reevaluated with more details promised in coming quarters.

Tarun Arora: "We have invested on Glucon-D second season, we have not seen substantial lift as we would have expected and therefore Glucon-D numbers are muted and lower than what we would have expected, but I think it will be a long haul, there is a legacy of the brand which it sells in a way, we are still committed and will continue to build the second season, but I think it take longer, it is not going to be one season play so it has been lower this year than we would have liked to."

Margin & Cost Structure

• Gross margin hit: On a nine-month basis, gross margins contracted by 270–300 bps, driven largely by raw material inflation across the portfolio. Most of the inflation has been absorbed, with all products except milk (which is largely Complan) now covered by price increases.
• Price increase mechanics: A 6.5% price increase was taken across the portfolio by the end of Q3. Management expects at least two-thirds of this to flow through in Q4. There is a good chance of recouping the nine-month gross margin loss, depending on product mix.
• Other expenses: Grew 17.4% YoY, driven by higher fuel costs (coal, husk), a statutory wage revision at manufacturing facilities in the Northeastern belt, and increased manufacturing activity ahead of the season. The wage revision is for workmen not on payroll and becomes the new minimum wage going forward.
• Employee expenses decline: Largely attributable to the closure of the Sitarganj facility at the end of Q1, with benefits fully accrued and captured this quarter. This is a recurring saving going forward.
• Gross margin ambition: Management aims to return to the original 50%+ gross margin level. Once inflation stabilises at current levels, the plan is to improve gross margins by 3–4% on an annualised basis, with EBITDA margin improvement led by gross margin expansion and right product mix.
• Long-term EBITDA target: The 20%+ EBITDA margin target will take at least a couple of years to reach. Steep inflation affects both cost structures and demand, making operating leverage harder to achieve.

Dr. Sharvil Patel: "The right answer for this is that we would like to go back to our original gross margins which was 50 plus and ideally with the portfolio we have our aim is to grow profitability and if we want to improve our EBITDA margins it has been only led by gross margin expansion and the right product mix so that would mean that we will have to grow our gross margins if we want to achieve that number so that is definitely the plan to continuously improve the gross margins once we see some stabilization on inflation."

Demand Environment & Volume Outlook

• Volume growth: Q3 volume growth was flat, partly due to a reduction in small seasonal categories like Glucon-D and Nycil, which are immaterial on an annualised basis but pulled down the quarterly growth number. The overall demand situation also remained muted.
• YTD perspective: On a year-to-date basis, sales grew 13.3% with approximately 6%+ volume growth in a very muted market. Market shares are at a five-year high despite significant premium pricing across the portfolio. Management suggested looking at moving averages rather than any single quarter given the volatility.
• Downtrading observed: Seen across multiple categories. Everyuth sachet sales are doing well, and Complan growth is largely coming from low unit price packs where the company under-participates. No downtrading has been observed in Glucon-D in rural markets yet.
• Green shoots, not yet conviction: Management is quite hopeful demand will improve, seeing green shoots in several places, but is waiting for them to fully shape up before calling a recovery.
• Volume ambition: The company is targeting double-digit volume growth over the next three to four years in a steady-state market, with a focus on volume-led growth through penetration and consumption increase, since five out of six brands are market leaders.

Tarun Arora: "Given the volatility of the overall situation and the category wise play I think it may be better to look at our YTD numbers or a moving averages to see our growth which give you a better perspective given this volatile situation."

Complan: Stabilisation in a Degrowing Category

• Category headwind: The health food drinks category has been degrowing for several quarters, with the only source of growth being low unit price packs where Zydus under-participates due to lower profit pools. Complan saw internal growth for the quarter even as Nielsen continued to report negative category growth.
• Share trajectory: Month-to-month market share has been increasing over the last four to five months after prior declines. Annuity-level share is practically stable over the last quarter.
• Strategic posture: Management will remain conservative, focusing on holding share rather than aggressive stances until the category stabilises. The plan is to grow high-value and high-volume products, using low-price architecture sachets only as a defence.
• Price architecture: The company launched 450g pouches matching some competitive price points without exactly matching the dramatic price cuts made by competition.
• Communication pivot: Building a differentiated nutrition USP around superior protein presence versus other products, with communication focused on overall growth, stronger memory, and concentration.
• International disruption resolving: Complan’s international business was impacted by supply issues in New Zealand (third-party supplier changes now resolved) and demonetisation in Nigeria (its largest market, where demand is now back). A subsidiary is being set up in Bangladesh to push international business further.

Tarun Arora: "The biggest challenge for us to deal with this is that category has been degrowing and the only source of growth for the category has been low unit price tax which we under participate given the profit pools being lower in that part of the market."

Distribution, Channels & International

• Distribution expansion: Direct distribution has grown from approximately 5 lakh to 6.1 lakh outlets. Total general trade availability has crossed 0.25 crore outlets, up from approximately 0.18 crore in 2019.
• E-commerce: Market shares on e-commerce platforms are equal to or ahead of general trade shares across the portfolio. Complan is doing particularly well, with e-commerce shares ahead of general trade shares. A dedicated e-commerce team has been in place for almost five years, predating the Heinz acquisition.
• International business: The two biggest drivers remain the Complan and Sugar Free franchises. Good possibilities exist around Nutralite, Glucon-D, and Everyuth in limited international markets, but the lead will remain around Sugar Free and Complan. The international business is about a couple of quarters behind the ₹100 crore target due to earlier disruptions.
• Seasonal readiness: The coming two quarters (Q4 and Q1) will have high salience of the seasonal portfolio. The manufacturing and supply chain network has been readied to ensure smooth and on-time supplies. Inventory in the system is normal and in sync with the sales plan.

Guidance & Commitments

Key Metrics