Rating Rationale
August 10, 2020 | Mumbai
Zydus Wellness Limited
 Rating Reaffirmed 
 
Rating Action
Rs.1500 Crore Non Convertible Debentures CRISIL AA+/Stable (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA+/Stable' rating on the non-convertible debentures of Zydus Wellness Limited (ZWL).
 
In fiscal 2020, the company reported revenues of Rs 1,767 crore, reflecting the first full year impact of Heinz India Pvt Ltd (Heinz) acquisition. The operating margin stood at 18.2% in fiscal 20201 as against 20.7% in fiscal 2019, primarily due to increase in agro-commodity and hence input costs and one-off expenses associated with acquisition.
 
The nation-wide lockdown imposed to curb Covid-19, impacted the company's operations in March and April 2020. Consequently, the company's revenue is expected to marginally de-grow in fiscal 2021 and grow by 10-12% over the medium term. Operating margin is expected to sustain at 18-19% over the medium term, backed by synergies with the Zydus Cadila group's pharma distribution channel and continued focus on new product launches and advertisement and initiatives to strengthen brands.  
 
Financial risk profile will remain average, with gearing and adjusted networth of 0.5 time and Rs 2,912 crore, respectively, as on March 31, 2020.  While the ratio of net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) has increased sharply to ~8 times because the acquisition was towards the end of fiscal 2019, it is likely to improve to about 3 times by the end of fiscal 2022. Debt protection metrics are expected to improve gradually over the medium term, backed by healthy profitability.

Analytical Approach

For arriving at the rating, CRISIL has combined the business and financial risk profiles of ZWL and its 100% subsidiary companies, Zydus Wellness Products Ltd (erstwhile Zydus Nutritions Ltd), Liva Nutritions Ltd, Liva Investment Ltd and Zydus Wellness International DMCC , because of business and financial linkages. Goodwill and brands on acquisition of Heinz have been amortised over 10 years, and profit after tax (PAT) and networth have been adjusted accordingly. CRISIL has applied its parent notch-up framework to factor in ZWL's strategic importance to, and expectation of need-based support from, Cadila Healthcare Ltd (Cadila Healthcare; 'CRISIL AA+/Stable/CRISIL A1+').
 
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths: 
* Strategic importance to, and expectation of strong support from, Cadila Healthcare
The rating factors in the expectation of strong support that ZWL is expected to receive from Cadila Healthcare because of the latter's majority ownership in ZWL and the increasing importance of the consumer wellness business to the Zydus Cadila group.
 
Cadila Healthcare holds 63.55% in ZWL, as on June 30, 2020. ZWL's strategic importance is expected to remain critical to the Zydus Cadila group, given the significant capital employed (acquisition cost of Rs 4,700 crore for Heinz) in the company. Furthermore, with strong synergies expected between ZWL's existing business and that of Heinz, the consumer wellness segment is likely to account for about 13% of the group's consolidated revenue over the medium term.
 
The rating also factors in articulation from Cadila Healthcare that ZWL is likely to remain strategically important to the parent, and that the Zydus Cadila group (including ZWL) will maintain a prudent financial policy and sufficient liquidity to service debt. CRISIL believes Cadila Healthcare will continue to have a majority ownership in, and management control of, ZWL over the medium term. And as seen in the past for the acquisition, ZWL is expected to receive need-based support from Cadila Healthcare and the promoters.
 
* Leading market position in niche consumer wellness products
ZWL's product portfolio includes brands such as Sugar Free, Everyuth, and Nutralite, which are market leaders in their respective categories of sugar substitute, skin scrubs/peel-offs and fat spreads, respectively. Further the acquired brands - Nycil and Glucon-D also maintained their leadership positions in their respective categories of prickly heat powder and glucose powder, with market shares of 34% and 59%, respectively (as on March 31, 2020). ZWL has capitalised on research and development (R&D) capability and launched various new products to meet evolving consumer needs for healthier alternatives. For instance, in fiscal 2020, the company launched sanitiser under Nycil brand and is also about to launch new products under Glucon-D, Complan and Nutralite brand in fiscal 2021. Focus on innovation has enabled the company to maintain steady market share of its brands.
 
* Strong synergies expected from the Heinz acquisition
The acquisition of Heinz has enhanced ZWL's product basket. Revenue and operating margin have improved significantly in fiscal 2020. Through the acquisition, ZWL has diversified its product profile and added Glucon-D, Complan, Nycil, and Sampriti Ghee having annual revenue of Rs 1,150 crore, prior to the acquisition. These brands have healthy market position and high brand recall. However, relatively low gross margin of the acquired brands will lower ZWL's blended operating margin to about 18% over the medium term from 21-23% historically. In fiscal 2020, the company registered lower operating margin of 18% because of one-time costs related to acquisition, increase in commodity prices. The acquired brands will benefit from ZWL's well-diversified cosmetic and pharma distribution channel and the indigenous brands will similarly benefit from Heinz's general trade distribution channel. The company has focused on widening the direct distribution coverage. Ability to launch new variants and scale-up acquired brands will be critical to capitalise on expected synergies.
 
Weaknesses:
* Average financial risk profile
Financial risk profile is likely to be modest over the medium term, given the large acquisition and partial debt-funding of the same. The acquisition of Heinz was nearly seven times ZWL's networth as on March 31, 2018. Equity funding by private investors and the promoter group has strengthened the networth to over Rs 3,000 crore as on March 31, 2019. However, the benefits of acquisition are expected to accrue only over the medium term. Consequently, return to capital employed (RoCE) is expected to be significantly lower over the next two-three years. Debt protection metrics are expected to improve gradually over the medium term, backed by healthy profitability.
 
* Exposure to intense competition
The Indian FMCG industry has both organised and unorganised players across various segments and product categories. ZWL will have to consistently incur high advertisement cost (about 13.5% of sales) to increase its competitive position and improve the market share of acquired products. Due to intense competition, Complan has lost market share in the past few years. Intense competition will continue to restrict players, including ZWL. Further, the business risk profile is constrained by seasonality of the acquired products, with about 70% revenue expected during January to June and 30% in rest of the year. This is because Glucon-D and Nycil are concentrated in summers. The company aims to change the mix to 60:40 by introducing off-season variants.
Liquidity Strong

ZWL has strong liquidity, driven by healthy cash accrual, nil term debt obligation until December 2021, and moderate working capital requirement. Additionally, liquidity is backed by need-based support from Cadila Healthcare. The company had healthy cash surplus of Rs 193 crore as on March 31, 2020. Despite sizeable debt raised for the acquisition, available moratorium on the debt is expected to provide sufficient time for ZWL to integrate and ramp up acquired business operations, and meet debt obligation. The company has repayment obligation of Rs 500 crore in fiscal 2022, which is likely to be refinanced with low cost long term debt.

Outlook: Stable

CRISIL believes ZWL's business performance will benefit significantly from the acquisition of Heinz. The financial risk profile, however, will remain average due to the large debt-funded acquisition. ZWL will remain strategically important to Cadila Healthcare, and continue to benefit from the strong support from the parent. A revision in the rating on Cadila Healthcare may lead to a similar revision in the rating on ZWL.

Rating Sensitivity factors
Upward factors
* Stronger-than-expected business performance, increasing RoCE to over 12%
* Additional equity infusion, leading to debt reduction and improvement in credit metrics
 
Downward factors
* Weaker-than-expected business ramp-up lowering operating margin to less than 12%
* Additional, debt-funded acquisition or sizeable capex
* Reduced support from the parent or deterioration in credit profile of the parent
About the Company

Incorporated on November 1, 1994 as a public limited company, with the name of Carnation Health Foods Ltd. With effect from June 8, 2006, Cadila Healthcare acquired 61.56% shareholding in the company to make it its subsidiary. Subsequently Cadila Healthcare transferred its consumer products division and renamed the acquired company as ZWL.  ZWL operates as an integrated consumer company with business encompassing the development, production, marketing, and distribution of health and wellness products. The product portfolio includes flagship brands such as Sugar Free, Everyuth, and Nutralite and acquired brands of Glucon D, Complan, Nycil and Sampriti Ghee. ZWL is presently managed by Dr Sharvil Patel, third generation entrepreneur. The Zydus Cadila group has acquired Heinz through ZWL with effect from January 30, 2019.
 
ZWL is listed on the Bombay Stock Exchange and the National Stock Exchange. As on June 30, 2020, 67.85% stake was held by the promoters and family, 14.93% by alternative investment funds, 2.01% by foreign portfolio investors, and the rest by others.
 
For the first three months of fiscal 2021, company reported operating income of Rs 537 crore and profit after tax of Rs 89 crore as against Rs 620 crore and Rs 80 crore, respectively, for the corresponding period of previous fiscal.

1Fiscal 2020 was the first full year of operation post acquisition of Heinz business.

Key Financial Indicators
Particulars Unit 2020 2019
Revenue Rs crore 1766.8 842.3
Adjusted PAT* Rs crore -302 99.0
Adjusted PAT margin* % -17.1 11.8
Adjusted debt/adjusted networth Times 0.52 0.48
Interest coverage Times 2.37 7.08
*Adjusted for goodwill and intangibles amortisation

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size
(Rs Cr)		 Complexity level Rating Assigned
with Outlook
INE768C07017 Non-Convertible Debentures 16-Jan-19 9.14 14-Jan-22 500 Simple CRISIL AA+/Stable
INE768C07025 16-Jan-23 500
INE768C07033 16-Jan-24 500
 
Annexure - List of entities consolidated
S. No Name of entity   Extent of consolidation Rationale for Consolidation
1 M/s. Zydus Wellness Products Ltd
 (erstwhile Zydus Nutritions Ltd)		 Fully consolidated Subsidiary
2 M/s Liva Nutritions Ltd Fully consolidated Subsidiary
3 M/s Liva Investment Ltd Fully consolidated Subsidiary
4 M/s Zydus Wellness International DMCC Fully consolidated Subsidiary
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Non Convertible Debentures  LT  1500.00
10-08-20  		CRISIL AA+/Stable      24-12-19  CRISIL AA+/Stable  28-12-18  CRISIL AA+/Stable    --  -- 
All amounts are in Rs.Cr.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Fast Moving Consumer Goods Industry
CRISILs Criteria for Consolidation
Criteria for Notching up Stand Alone Ratings of Companies based on Parent Support

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