Buy This Small Cap Consumer Goods Stock For 35% Potential Gains, Given Over 90% Returns In 5 Years

Stock Outlook

The current market price (CMP) of Zydus Wellness is Rs 1,624.05 per share. The 52-week low of the stock was recorded on 15th Jun e 2022 at Rs 1,430 per share, while the 52-week high was recorded on 21st September 2021 at Rs 2,476.85 per share. The share of the company is trading at Rs 194.05 above the 52-week low levels and Rs 852.8 below the 52-week high of the stocks. 

It has a market cap of Rs 10,334.18 crore. Investors can expect 35% of strong potential returns considering the CMP of the stock and the Target Price of Rs 2,185. 

The stock has given positive returns in the last 1 month (5.45%) and 3 months (4.13%), whereas in the past 6 months and 1 year it gave negative returns of 13.82% and 24.45%, respectively. It also gave positive returns on long-term investments of 3 years (20.95%) and 5 years (91.24%). 

Brand can grow double-digit

Average penetration level of the combined portfolio brands stands at ~20% (12-24% across categories) signifies higher growth headroom versus its FMCG peers. Theoretically, increase in penetration is one of the growth planks for a category's growth longevity. Further, management's quest towards improving brand awareness (ad spends at ~14% of revenue) and four-five new product/variants launches will not only improve penetration but also support double-digit growth in the foreseeable future. 

Aggressive distribution expansion

Zydus Wellness aims to widen direct distribution coverage from 2.25mn currently to 3.5mn-4mn by FY25 and direct reach from 0.55mn to about 1mn. We believe that restructuring of the distribution channel will continue to yield benefits as consumer sentiments improve and penetration levels rise across categories in which the company operates, especially considering its market-leading position in five of its six segments. 

Strong outlook for international business

Zydus Wellness's Sugar Free and Complan brands constitute 93% of international business. The company has entered new markets such as Hong Kong, Lebanon, Zimbabwe, Muscat, Ethiopia and Australia in FY22. Management has guided for high-double-digit growth in the international business, likely crossing Rs 1bn in revenue in FY23. The target is to have 8-10% of revenue from the business in the next 4-5 years from ~4% in FY22. 

Positive surprise awaited; Brokerage retain BUY for Target price of Rs 2185

"Zydus Wellness is trading at ~23x FY24E EPS. We retain BUY and our Target Price of Rs 2,185, set at ~31x FY24E EPS on the back of new launches, increasing distribution strength, a broader presence through existing brands, its ability to cater to white spaces, and a strong gross margin which gives it the leeway to spend more on brand building. We are also positive on Zydus Wellness's debt reduction measures, faster FCF generation and superior execution," the brokerage has said.