Buy This Small-Cap FMCG Sector Stock For 37% Potential Gains, Recommended By BOB Capital Markets

BOB Capital Markets in its recent report has recommended 'buy' the stocks of Zydus Wellness Limited for a target price of Rs 2,185 apiece. Considering the estimated target price, the brokerage claims 37% potential gains if the investors buy the stock of the company at the current market price. Zydus Wellness Limited is a small cap FMCG sector company having a market cap of Rs 10,218.05 crore.

Stock outlook

26 August, the stock closed at Rs 1,605.80 apiece, after a fall of 0.41%. The 52 week low of the stock is Rs 1,430 recorded on 15 February 2022. The 52 week high is Rs 2,476.85 recorded on 21 September 2021.

Return on investments

Over the week, the stock has fallen 0.32%. Whereas, in the past 1 and 3 months, the stock moved up roughly 0.65% and 5.66%, respectively. In the past 1 year, the stock has fallen 29.72%. In the past 3 years, the stock gave a negative return of 3.81%. It gave a massive positive return of 84.27% in the past 5 years.

Key takeaways

The brokerage interacted with Zydus Wellness Limited's CFO Umesh Parikh to gain a perspective on the company's growth prospects and sector outlook. Key takeaways:

Brand can grow in double digits

The average penetration level of Zydus Wellness Limited's portfolio brands stands at ~20% (12-24% across categories), signifying higher growth headroom versus its FMCG peers. Theoretically, an increase in market penetration from modest levels is one of the levers for sustained, long-term category growth - reflected in the near-double-digit uptick in these categories over the years. The company has identified white spaces in the market and has the R&D backbone to launch new variants and extensions. Launches (last 36 months) contribute ~3% of revenue which management expects to rise to ~5% in two years.

Distribution expansion

Zydus Wellness Limited aims to widen direct distribution coverage from 0.6mn to ~1mn by FY25. Growth in modern trade and e-commerce channels are likely to further boost sales.

 

Sitarganj plant to yield cost savings

The company incurred one-off expenses of Rs 29mn on account of cessation of Sitarganj (Uttarakhand) plant operations in Q1FY23 to maintain a cleaner environment. ZYWL expects to incur some more one-off expenses in Q2 towards employee and transfer-related costs even as savings should far outweigh these costs and remain recurring in nature

 

Growth drivers

Per management, growth drivers include operating leverage as the topline grows, potential reduction in distributor margin, locking in of RM prices as they turn favourable, cost savings from Sitarganj plant closure, and other cost controls

Strong growth visibility; retain BUY for a target price of Rs 2,285

Zydus Wellness Limited is trading at 23x FY24E EPS. "We retain BUY with a Target Price of Rs 2,185 (~31x FY24E EPS) on the back of new launches, increasing distribution strength, a broader presence through existing brands, ability to cater to white spaces, debt reduction measures, robust FCF generation, superior execution and strong gross margins enabling higher brand-building spends," the brokerage has said.

 

Disclaimer

The stock has been picked from the brokerage report of BoB Capital Markets. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.