A key challenge for a small, but fast growing firm is how well it manages growth. Growth is always welcome, but it can put pressure on a company’s resources—managerial as well as financial. Zydus Wellness Ltd appears to be doing a reasonable job of managing growth, as it moves closer to its target of reaching a turnover of Rs 500 crore by fiscal 2014 (FY14). During FY11, its sales had risen 25% to Rs 336 crore.
The company has three main product lines—the EverYuth skincare range, the Sugar Free range of sugar substitutes and margarine brand Nutralite. Zydus’ cash flow statement, part of its FY11 annual report, shows that while its operating profit (before working capital changes) rose 23.5%, cash generated from operations fell to Rs 78 crore from about Rs 80 crore in the previous year.
Working capital requirements rose during the year, causing this drop. When a business grows in size, debtors and inventory holdings, too, increase. In Zydus’ case, debtors have fallen and inventory is flat, which is good, considering business rose 25%. But creditors (people to whom money is owed) fell sharply. That caused a drop in cash flow from operations. Higher tax payments further affected net cash from operations, which fell 23%.
During the year, material consumption rose sharply, rising nearly 15 percentage points more than sales did, and adversely affected profitability.
The company expects competition to increase in the sugar substitute segment, where it holds an 86% market share. Zydus has launched variants to keep up the momentum in this segment. Higher competition is a risk, but may also help expand the market. A growing number of diabetics translates to significant market potential.
Skincare is a large market, but has a number of players vying for share. Zydus has focused on a few categories such as the face wash, face mask and scrub sub-segments. But in FY11, seasonal products such as sun blocks, body lotions and cold creams grew well; the company now plans to push these products also.
ActiLife marks Zydus’ entry into a new category, a nutritional milk additive. The company test-marketed the product in Tamil Nadu and a national roll-out is on the cards. If successful, it will become another growth driver.
Zydus has managed growth well till now, is a zero-debt company, and has a cash balance of Rs 86 crore on a balance sheet of Rs 143 crore. Its cash pile fell during FY11 due to an investment of Rs 40 crore in a new plant in Sikkim to make the Sugar Free and EverYuth products. When commissioned, its business could scale up further and gain from tax benefits as well.
Investors will want to see cash flows increase in line with the business in FY12. The share has gained about 17% in a year, but has been moving in a range since February. Investors will keep a watch on margins, especially if input costs moderate, as that will let more of the sales growth reflect in profit growth.