| Zydus Wellness Limited | ||
| 'CRISIL AA+/Stable' assigned to NCD | ||
| 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 assigned its 'CRISIL AA+/Stable' rating to 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 98% partnership firm, Zydus Wellness Sikkim, because of significant business and financial linkages. CRISIL has also factored in the acquisition of Heinz, with the transaction expected to be complete in the last quarter of fiscal 2019. Goodwill and brands on acquisition have been amortised over 10 years, and profit after tax and networth have been adjusted accordingly. CRISIL has applied its parent notch-up 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 owns 72.08% in ZWL, as on September 30, 2018. The parent's stake is likely to remain over 60% post private equity participation in the funding of the acquisition of Heinz, and infusion of Rs 1,175 crore by Cadila Healthcare in ZWL. ZWL's strategic importance is expected to remain critical to the Zydus Cadila group, given the significant capital expected to be employed (acquisition cost of Rs 4600 crore for Heinz) in the company. The acquisition cost is over a quarter of the Zydus Cadila group's capital employed. Furthermore, with strong synergies expected between ZWL's existing business and Heinz's business, the consumer wellness segment is likely to account for about 13-15% of the Zydus Cadila 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 and for the ongoing 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% market share in the sugar substitute industry. Similarly, Everyuth and Nutralite lead in the categories of skin scrubs/peel-offs and fat spreads, respectively. 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, on e-commerce platforms 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 will enhance ZWL's product basket, quadruple its revenue, and double its operating profit from fiscal 2020. Through the acquisition, ZWL will diversify its product profile and add Glucon-D, Complan, Nycil, and Sampriti ghee having total revenue of Rs 1,150 crore (for 12 months ended June 30, 2018). 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 23-24% currently. The acquired brands will benefit from ZWL's pharmacies reach and ZWL's indigenous brands will similarly benefit from Heinz's general and moderate trade distribution channel. Ability to launch variants and scale-up acquired brands will be critical to capitalise on expected synergies. Weakness * Moderate financial risk profile ZWL's financial risk profile is likely to moderate over the medium term, given the large acquisition and partial debt-funding of the same. The acquisition of Heinz is nearly 7 times ZWL's networth. Equity funding by private equity investors and the promoter group will bolster ZWL's networth to over Rs 3,000 crore by the end of fiscal 2019. However, the benefits of the acquisition are expected to accrue over the medium term. Consequently, ZWL's return to capital employed (RoCE) is expected in single-digits for the next 2-3 years. Interest coverage and net cash accrual to total debt ratio are also expected to decline from current robust levels to moderate levels over the medium term. * 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 (14-15% 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. CRISIL believes the intense competition in the FMCG sector will continue to exert pressure on players, including ZWL. |
| Outlook: Stable |
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CRISIL believes ZWL's business performance will benefit significantly from the acquisition of Heinz. Its financial risk profile, however, will remain average due to large acquisition which is expected to be partially debt-funded. ZWL will remain strategically important to Cadila Healthcare, and continue to benefit from strong support from the parent over the medium term. A revision in the rating on Cadila Healthcare may lead to a similar revision in the rating on ZWL. |
| About the Company |
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Incorporated in 1994, 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 brands such as Sugar Free, Everyuth, and Nutralite. The company is part of the Zydus Cadila group and subsidiary of the flagship company Cadila Healthcare. On October 24, 2018, the Zydus Cadila group announced acquisition of Heinz through ZWL. |
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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 - Details of consolidation | ||||||||||||||
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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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