| Zydus Wellness Limited | ||
| Rating Reaffirmed | ||
| Rating Action | ||
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| 1 crore = 10 million | ||
| Refer to annexure for Details of Instruments & Bank Facilities |
| Detailed Rationale |
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CRISIL has reaffirmed its 'CRISIL AA+/Stable' rating on the non-convertible debentures of Zydus Wellness Limited (ZWL). |
| Analytical Approach |
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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 and Liva Investment Ltd, 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. |
| Key Rating Drivers & Detailed Description |
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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 September 30, 2019. 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 Heinz's business, 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. Sugar Free is the flagship brand and has 94.6% market share (as on September 30, 2019) in the sugar substitute industry. Similarly, Everyuth and Nutralite lead in the categories of 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 34.2% and 59.3%, respectively (as on September 30, 2019). Given the pharmaceutical background of the promoter group, ZWL has capitalised on research and development (R&D) capability and launched variants to meet evolving consumer needs for healthier alternatives. For instance, in fiscal 2019, it launched Sugar Lite, a low-calorie substitute for sugar after a year of R&D. 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 may improve significantly from 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. ZWL's operating profit will double to over Rs 300 crore annually. However, relatively low gross margin of the acquired brands will lower ZWL's blended operating margin to 17-18% over the medium term from 21-23% historically. In the first half of fiscal 2020, the company registered subdued operating margin of 15% because of one-time costs related to acquisition, increase in commodity prices and off-season in Nycil and Glucon-D. With pick-up in revenue and expected price increase of some key brands, profitability is expected to recover in the second half. The acquired brands will benefit from ZWL's well-diversified pharmacies and the indigenous brands will similarly benefit from Heinz's general and moderate trade distribution channel. The company has focused on widening the direct distribution coverage. Ability to launch 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 weak over the medium term, given the large acquisition and partial debt-funding of the same. The acquisition of Heinz was nearly 7 times ZWL's networth as on March 31, 2018. Equity funding by private equity investors and the promoter group has strengthened the networth to over Rs 3,000 crore as on March 31, 2019. However, the benefits of the acquisition are expected to accrue only over the medium term. Consequently, return to capital employed (RoCE) is expected to be significantly lower in fiscal 2020 and over the next 2-3 years. Debt protection metrics are expected to be moderate with interest coverage and net cash accrual to total debt ratios of 2.39 times and 0.11 times, respectively for fiscal 2020. * 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 16% 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 through introducing off-season variants as well. |
| Liquidity Strong |
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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 over Rs 200 crore as on September 30, 2019. 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 build up liquidity to meet debt obligation. The repayment obligation of Rs 500 crore in fiscal 2022 may be met by business ramp up. |
| Outlook: Stable |
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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 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 |
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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 leading to decline in operating margin to less than 12% * Additional, debt-funded acquisition or sizeable capital expenditure * Reduced support from the parent or deterioration in credit profile of the parent |
| About the Company |
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Incorporated on November 1, 1994 as a public limited company, with the name of 'Carnation Health Foods Limited'?. With effect from June 8, 2006, Cadila Healthcare acquired 61.56% shareholding in the Acquirer 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 India Private Limited through ZWL with effect from January 30, 2019. |
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
| Annexure - Details of Instrument(s) | ||||||||||||||||||||
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| Annexure - List of entities consolidated | ||||||||||||||||||||
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
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