Zydus Wellness Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Demand still soft, green shoots cited: Revenue declined ~3% YoY in a quarter where rural demand lagged and the festive season shifted late, but management expects growth to resume from Q4.
• Personal care is the bright spot: Everyuth delivered another quarter of double-digit growth, while the food and nutrition portfolio remains a mixed bag with brand-specific headwinds.
• Complan is stabilizing, not yet accelerating: A 16% penetration gain is an early positive signal, but management declined to confirm it translates to double-digit revenue growth and says the brand still needs time.
• Margins have a clear path up: Gross margins should improve further as input costs sit at multi-year lows, and management targets a return to 17–18% EBITDA margins over the next two years.
• What to watch next quarter: Whether the promised Q4 demand recovery materializes, the summer season build-up for Glucon-D and Nycil, and the restart of Sugar Lite sales after the Supreme Court allowed inventory clearance.

Demand Environment

• Sequential pressure persisted: The FMCG sector continued to face demand headwinds similar to last quarter, with rural buoyancy lagging due to low agricultural yields, delayed winters, and a late festive season.
• Summer-skewed portfolio timing: Q4 is a distributor-loading quarter for summer products like Glucon-D and Nycil; management says the season start is good but the real test comes in March and April.
• Green shoots, not conviction: Management describes the demand improvement as "early days" and "only green shoots," with the expectation that FY25 should return to normal double-digit growth.

Tarun Arora: "So, even in the last call, we had said that we expect growths to be coming back from quarter four and that's what I think it's looking like, that demand is improving though early days and it's only green shoots."

Portfolio Performance

Personal Care

• Everyuth sustained momentum: The brand delivered another quarter of double-digit growth, driven by its core scrub and peel-off products, with new launches like body lotion and channel-led face wash initiatives adding incremental growth.
• Nycil contributed: The brand aided the personal care segment and has completed season preparedness with fresh inventory now being replenished across trade channels.

Food & Nutrition

• Nutralite volume-value divergence: The brand saw good volume demand but negative value growth because pricing had to be adjusted downward to pass on lower input oil prices.
• Glucon-D ahead of category: The brand grew faster than its category and registered strong growth for the quarter, though YTD performance remains under pressure because the season was impacted in Q1.
• Complan showing early signals: The brand registered ahead-of-category volume off-take growth and a 16% expansion in household penetration, but management says it still needs time and declined to confirm this translates to at least 10% YTD revenue growth.
• Sugar Free split personality: Aspartame-based products (Gold, Natura) have had a muted run post-WHO, while Sugar Free Green (stevia-based) has grown consistently for 11–12 quarters and is expected to disproportionately drive future portfolio growth over a 3–5 year horizon.
• Sugar Lite disruption: Growth in the sweetener portfolio was impacted by very low sales of Sugar Lite, which was off the market for most of the period until the Supreme Court allowed existing inventory clearance toward the end of Q3.

Tarun Arora: "I think we have had two things that have affected overall Sugar Free business. One has been SugarLite not being there for a major part of the business and Aspartame has had a muted run post WHO."

Heinz Acquisition: The Multi-Year Reset

• Structural EBITDA hole: The acquired portfolio lost approximately ₹30 crore in GST budgetary support that was present in the base at acquisition, creating a permanent gap in reported profitability.
• Inflation hit gross margins hard: Post-FY21, input inflation in milk, oil, and DMH compressed gross margins across the Heinz portfolio.
• Market share gains where it matters: Nycil improved from 31% to 35% market share, and Glucon-D consolidated from 58% to 60%+, both touching peak levels over the last five years.
• Complan remains the problem child: The brand was already under stress at acquisition, having dropped from double-digit to mid-single-digit market share, and remains at a similar ~5% level. Management held pricing discipline while competitors dropped prices, and now sees improving input costs as a tailwind, but recovery is a "longer haul than estimated."

Tarun Arora: "The good thing is that while the leaders drop the prices, we have held ourselves our nerve. We didn't drop the prices. We played with the price point and held us as well."

Margins & Cost Outlook

• Other expenses rose 17% YoY: Driven by strategy consultant costs and an increase in minimum wages at the Ahmedabad and Aligarh facilities.
• Input costs at trough: Management stated this is the lowest cost point they have seen, with the expectation that costs should only get better from here, barring any external shocks.
• Gross margin trajectory: Further improvement is expected on a full-year basis as commodity and milk prices stabilize, with Q4 gross margin projected to be higher than Q3.
• EBITDA margin ambition: Management targets a return to 17–18% over the next two years, with gross margin improvement as the biggest driver, supplemented by operating leverage if demand plays out as expected.
• Complan margin tailwind: As input prices improve, better profitability is expected to trickle down, enabling measured investment without over-the-top spending.

Tarun Arora: "From a cost point of view, I think this is the lowest we have seen. So, cost-wise we should be only getting better, hopefully with no crazy situations happen. Demand is clearly a situation which is dynamic in nature. Right now, we are seeing a positive moment and we do expect things to only get better from here."

Distribution & Reach

• Nielsen restatement: Nielsen revised availability numbers upward, restating 2023 reach at 0.29 crore outlets versus the previously stated 0.25 crore.
• Three-year GT ambition: Management plans to reach 0.35 crore outlets from a general trade standpoint over the next three years.
• Direct distribution push: A drive to add 50,000 to 1 lakh more directly serviced outlets is planned post the summer season, balancing reach expansion against cost-to-serve.
• Channel breadth focus: The strategy is not just about outlet count but making products more widely available with a wider range across existing outlets, including continued gains in non-trade and e-commerce channels.

International Business

• Double-digit nine-month growth, but uneven: Overall international performance was strong, but dragged by Africa, specifically Nigeria, which faced macroeconomic challenges.
• Bangladesh and Middle East on track: Bangladesh is receiving investment through a newly created subsidiary with good traction expected; the Middle East is performing as planned.
• New product pipeline: Sugar Free D'lite launches are starting in the Middle East and will extend to other markets.

Guidance & Commitments

Key Metrics