Zydus Wellness Ltd Q2 FY2024 Concall Summary

Key Takeaways

• Mixed quarter, weather-hit: Overall volume was flat as the largest brand Glucon-D faced seasonality and weather headwinds, while Personal Care delivered high double-digit growth and Nutralite saw strong volume momentum suppressed by price corrections.
• Gross margin recovery underway: Gross margins improved 200 bps YoY, led by moderating non-dairy input costs, with dairy stabilizing; management expects this trend to continue and will reinvest the gains into advertising.
• Complan structural story intact: The brand is widening its consumer base for the fourth consecutive year, driving volume improvement in Q2 even as the broader Food and Nutrition segment remained flat.
• Litigation and seasonality weigh on visibility: Sugar Lite remains off shelves with no resolution timeline, while the portfolio's seasonal skew means Q2/Q3 margins are structurally lower, making trailing-twelve-month comparisons more meaningful.
• What to watch next quarter: Whether Glucon-D demand normalizes with the festive season and Q4, the pace of gross margin expansion into H2, and any progress on the Sugar Lite Supreme Court injunction.

Demand & Brand Performance

• Urban-rural split: Urban markets continued to grow while rural demand lacked recovery, pressured by rising food prices and uneven weather patterns across the quarter.
• Glucon-D drag: The largest brand suffered from seasonality and adverse weather, pulling down overall company growth; management expects normalization starting Q4, aided by the festive season.
• Nutralite volume-value gap: Strong volume surge was offset by market-driven price reductions, suppressing value growth; festive season is expected to aid further demand recovery.
• Personal care strength: Nycil benefited from hot and humid weather, while Everyuth maintained consistent high double-digit growth across several quarters, with particular strength in modern trade and e-commerce channels.
• Complan penetration: The brand is recruiting new consumers and widening its consumer base every year for four years, a structural shift that management credits for aiding volume improvement in Q2.
• Sweetener headwinds: Growth remained muted due to the absence of Sugar Lite sales from ongoing trademark litigation and broader sectoral pressures, including the lingering but fading Aspartame controversy where social media conversation has died down but offtake has not yet normalized.

Tarun Arora: "For me, the structural shift is because we are seeing a penetration going up and that is a good sign because we are recruiting new consumers and I look at over last 4 years, every year we have been widening our consumer base and that I think is a good sign which is really aiding the volume growth."

Margins & Cost Structure

• Gross margin trajectory: 200 bps YoY improvement in Q2, driven by moderating rates in the non-dairy portfolio; dairy prices have stabilized with only a minor drop, and management expects the trend to continue or get better in H2.
• EBITDA margin seasonality: Q2 and Q3 margins are structurally lower than Q4 and Q1 due to portfolio mix weighted toward seasonal brands like Glucon-D and Nycil; management urges investors to assess margins on a trailing-twelve-month or annual basis rather than quarterly.
• Margin recovery path: Annualized EBITDA margins dropped from 17-18% to around 15% over the last 2-3 years due to input inflation; management expects to claw back to 17-18% over the next couple of years before planning further improvement.
• Advertising reinvestment: Absolute ad spends were flat YoY, with cost efficiencies captured; as gross margins expand, advertising will be the biggest reinvestment priority, with spends expected to stay in line with last year but with potential upside in Q4 if business scales.

Management: "Going forward, I think as the gross margins expand, we will continue to invest back on advertising as the biggest priority for us."

Distribution & Channel Strategy

• General trade expansion: Direct GT distribution has doubled from 3-3.5 lakh outlets to over 6 lakh in 2-3 years, but outcomes have been less satisfying as general trade's share of overall FMCG has fallen; actions underway to improve outlet productivity and SKU density.
• E-commerce and modern trade: E-commerce has grown from 1% pre-COVID to 8-9% of business; Everyuth leads in these channels, which together represent 20-22% of its business, while brands like Glucon-D and Nycil have larger rural presence through sachets.
• Distribution ambition: Management's wish list is to cross 0.3 crore availabilities, up from the current more than 2.5 lakh, viewing access as critical to category expansion.

Management: "My wish list is we could cross 0.3 crore [availabilities]."

International Business

• Double-digit growth with a drag: International business grew double digits in H1 but fell slightly below expectations because Nigeria suffered severe currency devaluation, stalling business there; other markets continued to grow in good double digits.
• Nigeria recovery expected: The situation is getting streamlined and management expects the business to return as external factors are dealt with, enabling stronger international performance.

Portfolio & Innovation

• Everyuth deseasonalization: Management is evaluating body lotions to reduce seasonality and more innovations to expand the portfolio, building on face wash success in specific channels.
• Ayurvedic entry not imminent: When asked about expanding into the Ayurvedic space or acquiring a brand, management said business development is constant but had "no specific plans to share at this moment."
• No buyback or promoter purchase plans: Management confirmed there is no discussion on a buyback, and no comment on promoter open-market purchases as that decision is not made in the forum.

Guidance & Commitments

Key Metrics