Zydus Wellness Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Double-digit revenue, muted volume: Revenue grew 12.7% but volume growth was only 4.8%, signalling price-led expansion as commodity costs rose; gross margins held steady with a slight upward tilt.
• Personal Care is the consistent engine: The segment has delivered double-digit growth for 7 straight quarters, driven by category-building in market-leader brands Everyuth and Nycil.
• Food & Nutrition dragged by Complan: Segment growth is weighed down by Complan, a large but low-growth brand, plus inflationary pressure on consumption in that category.
• Margin recovery story still has legs: Gross margins have recovered what was lost between FY21 and FY23, and management sees further scope to improve; the target is 17–18% EBITDA in 6–8 quarters.
• What to watch next quarter: Whether the summer season delivers its outsized profit contribution, the pace of price increases across commodity-led products, and any sign that urban demand is reviving.

Topline & Volume Dynamics

• Price-led growth: Revenue growth of 12.7% on volume growth of 4.8% reflects price increases taken across multiple products where commodity costs rose, largely in commodity-led products.
• Urban demand sluggish: Muted FMCG demand with green shoots in some categories; rural consumption expanded steadily while urban demand remains soft, though management expects the setback to be temporary.
• Small packs gaining share: Small unit packs are growing faster, particularly in Personal Care where low unit price and consumer preference for one-time-use packs drive the trend.
• Online channel outperforming: E-commerce and modern trade contribute 10–11% of revenue and are growing much faster than the rest of the business, with market shares higher in these channels.
• Channel profitability balanced: Cost to serve is fairly comparable across channels; general trade has higher profitability but higher cost to serve from a large field force, while e-commerce offsets with bigger pack sizes and higher per-unit profit.
• Working capital to rise: As the proportion of e-commerce and modern trade increases, working capital intensity will rise even if margins stay stable, a secular trend management expects to continue in the medium term.

Arora: "We are hopeful that we'll continue this double-digit journey and execute well on our existing brands as well as new product portfolio."

Segment Performance

• Category-building over share-grabbing: Most brands are market leaders, so strategy focuses on expanding the category through penetration and consumption rather than taking share from competitors.

Margin Trajectory

• Gross margin recovery complete: Gross margins have improved like-for-like over the previous year for 6–7 quarters, recovering what was lost between FY21 and FY23; October–December numbers matched the same period in FY21.
• Recovery funded advertising: Part of the gross margin improvement was invested back into advertising, but that investment pace will not necessarily continue at the same rate going forward.
• Levers still available: Pricing is the number-one lever when costs rise; sourcing opportunities and reformulation also contribute, though reformulation is a long-run process.
• Cost efficiency program in place: Manufacturing and supply chain teams run a "fairly stiff" cost efficiency program, with the Zydus Group also running a strong program, though specific annual run-rate targets are not disclosed.
• Raw material hedging: Buying forward is done category by category; for palm oil, the procurement team may forward-buy based on Malaysian forward numbers if conditions are favourable, but refined palm oil is bought locally.

Arora: "We do believe that there is still scope for us to continue. We believe our journey is still not completed where we have stabilized. It's still going to go up."

Seasonality & Profit Structure

• Q4 and Q1 dominate profits: These two quarters constitute 85–90% of total annual profits, a pattern management does not expect to change in the short to medium term.
• Q4 tax dynamics: About ₹3.5–4 crores of deferred tax liability will be recorded in Q4; the effective tax rate will fall significantly because of higher profit before tax in that quarter.
• Tax rate shift ahead: The effective tax rate shifts to 21% from FY27.
• Summer season optimism: Management remains optimistic about Q4 given the last four quarters of business performance, though early days prevent specifics.

New Initiatives & Digital Bets

• Naturell acquisition closed: 100% equity acquired; one month of performance included in Q3 results; new product launches include choco-filled fiber bars, melting chocolate, fruit-filled bars, and protein bar bytes.
• Nutralite DoodhShakti extension: Professional range expanded into processed cheese.
• AI-powered recipe platform: Nutralite Chef AI lets consumers get recipe recommendations based on ingredients or ideas, with Nutralite product suggestions built in.
• Sales force digital tool: A data and analytics-based recommendation engine deployed for 1,500–1,600 salesmen at the last mile, suggesting what to sell more in each outlet based on its profile.
• Protein range early days: Management is optimistic about protein chips and cookies; full-quarter results will be available at Q4 to share more colour.

Arora: "Prior to acquisition, we saw a 3% to 5% kind of margins, but with synergy and scale and our work with them, we obviously expect the margins to grow in -- to a much higher level. And we believe FY '26, we could have an EPS accretive on this business."

Competitive & Strategic Context

• Amul's entry seen as validation: On Amul launching a butter substitute under the Delicious brand, management noted that a dairy major moving into butter substitutes signals Zydus is doing something meaningful enough to impact Amul's business.
• Growth ahead of industry: Management is focused on driving growth ahead of the industry, with government showing signs of supporting consumption and movement visible in rural areas.
• True North stake unresolved: When asked about the private equity shareholder's selling plans, management said they are not privy to True North's plans and directed the question to the shareholder directly.

Guidance & Commitments

Key Metrics