Zydus Wellness: A New Chapter

Zydus Wellness completed 100% acquisition of stake in Heinz India for Rs 4,595 crore.

This includes the brands Complan, Glucon D, Nycil Talcum Powder and Sampriti Ghee, 2 large manufacturing facilities in Aligarh and Sitarganj and teams devoted to operations, research, sales, marketing and support. Heinz India also has a strong distribution network of over 800 distributors, more than 20,000 wholesalers covering 29 states.

Valuation of Heinz India:
– Valuation of Rs 4,595 crore
– Revenue of Rs 1,150 crore
– EBITDA of Rs 225 crore
– 4x EV/Sales
– 20.4x EV/EBITDA
– 6-7% growth rate

Deal Comparison:
– This deal is inexpensive compared to GSK Cons (6x EV/Sales and 30x EV/EBITDA)
GSK is the market leader in the Rs 7,000 crore domestic health food drinks segment, with Horlicks holding a 49% market share, followed by Mondelez’s Bournvita at 11% and Complan at 7%.

Post Merger:
– Revenue will increase by 3 times to Rs 1,700 crore
– EBITDA of Rs 340 crore
– EBITDA margin 20%
– Aim to achieve double digit growth

Competitive Advantage:
– Iconic brands Complan, Glucon D and Nycil, which have a legacy of over 50 years
– Two #1 brands in the market, Glucon D and Nycil

Industry:
– Health Food Drinks (HFD) segment grows at 6%, whereas some of the other Food & Beverage (F&B) category grows at 16%, Ambit Capital reported
– The slow growth is forcing incumbents to exit the segment

Fund Raising:
– Zydus issued shares on a preferential basis to True North (Rs 1,000 crore), Pioneer Investment Fund (Rs 100 crore), Cadila (Rs 1,175 crore), Zydus Family Trust (Rs 300 crore). The issue price is Rs 1,382.
– Zydus raised debt by issuing NCD for Rs 1,500 crore.

Management:
– Dr. Sharvil Patel, Chairman & CEO, is associated with the company since 1997
– Dr. Patel has doctorate for his research work in Breast Cancer at John Hopkins, Bayview Medical Centre, USA

Investors:
– Promoters hold 72.5% of the company
– Matthews India Fund holds 3.8% of the company
– Reliance MF holds 3.1% of the company
– Azim Premji holds 3.5% of the company

Valuation:
The Promoter Group and Private PE invested Rs 2,575 crore, or at Rs 1,382 per share.

KSB India: A bet on rural theme

KSB Pumps, a 40.5% subsidiary of the €2.2b German company KSB AG, is the 4th largest player in the Indian industrial pumps and valves business. KSB manufactures a wide range of pumps used in the power, oil & gas and other industries. KSB has 5 plants located in Pune, Nasik and Coimbatore, with a total manufacturing capacity of 150,500 pumps and 186,000 valves and 9,200 tonnes of castings (ferrous and non-ferrous).

KSB has incurred sizeable capex in FY16 and FY17 for setting up a new manufacturing facility.

KSB derives 80% of its revenues from pump segment and remaining 20% from valves segment. Metal components and castings account for 40% of its raw material costs.

Competitive Advantage:
– Relatively strong and establshed market position
– Wide range of products spanning entire pumps and industrial valves
– Technology transfer from parent KSB AG, Germany in return for royalty
– Backward integration into castings
– Efficient working capital cycle of 60 days

Risk:
– Highly sensitive to commodity prices (ferrous and non-ferrous)
– Increasing competition from established local and MNC players
– Demand cyclicality

Investors:
– Promoters hold 66.4% of the company
– Reliance Capital holds 8.4% of the company
– DSPBR MF hold 2.4% of the company
– Sundaram MF holds 1.5% of the company
– Thyssenkrupp India holds 3.1% of the company

On 09 May 18, Kenneth Andrade’s firm bought 3.8 lakh shares of KSB Pumps for ₹31.5 crore, or at ₹830 per share.

Valuation:
ICICI Direct values KSB at 35x P/E on CY19E EPS of ₹30.7 and assign a target price of ₹1080.