Press Release

Zydus Wellness Limited

January 02, 2020
Ratings
Amount 1
Instrument Rating Rating Action
(Rs. crore)
1,500
Non-convertible CARE AA+; Stable
(Rupees One Thousand Five Reaffirmed
debenture issue (Double A Plus; Outlook: Stable)
Hundred Crore only)
Details of Instruments in Annexure-1

Detailed Rationale & Key Rating Drivers

The rating assigned to the Non-Convertible Debenture (NCD) issue of Zydus Wellness Limited (ZWL) continues to derive
strength from its strong parentage of Cadila Healthcare Limited (CHL) which provides significant financial flexibility, ZWL’s
strategic importance to CHL leading to expectation of strong support from its parent, its professional and experienced
management, strengthening of its product portfolio of market-leading brands in the Indian Fast Moving Consumer Goods
(FMCG) industry after the acquisition of Heinz India Private Limited (HIPL) along with its established marketing and
distribution network and expected synergy benefits from the acquisition. The rating is also underpinned by the
comfortable leverage of ZWL on account of infusion of equity share capital during FY19 (refers to the period April 1 to
March 31) for the acquisition.
The rating is, however, constrained due to lower than envisaged revenue and profitability during H1FY20 leading to
moderation in the debt coverage indicators along with low return indicators and susceptibility of its profit margin to
intense competition in the FMCG industry and volatility in raw material prices.

Rating Sensitivities
Positive Factors
 Significant increase in market share of its key products resulting in significant improvement in its profitability and
debt coverage indicators
 Improvement in Return on Capital Employed (ROCE) to more than 12% on sustained basis
Negative Factors
 PBILDT margin remaining less than 15% from FY21 onwards on a sustained basis.
 Any large size debt-funded capex or acquisition adversely impacting credit metrics of ZWL or its parent, CHL or lower
than envisaged support from its parent

Detailed description of the key rating drivers

Key Rating Strengths
Strong parentage: ZWL is a part of the Zydus Cadila group promoted by Ahmedabad-based Pankaj Patel and his family.
The promoter group has significant experience of more than six decades in the pharmaceutical industry. Flagship entity of
th th
Zydus Cadila group, CHL is the 4 largest pharmaceutical company in India and the 7 biggest pharmaceutical company in
the United States of America (USA) based on prescription (source: Company). CHL is among the top 3 players in pain
management, Oncology, Respiratory and Gynaecology therapeutic segments. CHL along with the promoter group holds
around 67.62% equity share capital in ZWL as on September 30, 2019. Apart from ZWL being a majority-owned subsidiary
of CHL, it is also strategically important to CHL in terms of diversifying the group’s business risk profile. During FY19, CHL
along with promoter family infused equity share capital of Rs.1,475 crore to fund the acquisition of HIPL. Due to its strong
financial profile, CHL is capable of providing any need-based financial assistance to ZWL.

Strengthening of portfolio of market-leading brands after the acquisition of HIPL: Before acquisition of HIPL, ZWL’s
brand portfolio consisted of three brands i.e. “Sugar-Free” (Sugar substitute), “Everyuth” (Skin Care) and “Nutralite”
(Health foods). Products under “Sugar-Free” brand are market leaders in the low-calorie sugar substitute category with
around 94% market share. Table Spread under “Nutralite” and scrub and peel off under “Everyuth” brand are also market
leaders in their respective product categories. During FY19, ZWL acquired HIPL with its four brands i.e. “Glucon-D”,
“Nycil”, “Complan” and “Sampriti Ghee”. Products under “Glucon-D” and “Nycil” brands are market leaders in their
respective categories. “Complan” despite not being a market leader and with relatively subdued performance, has strong
brand recall value.
Strong R&D capabilities of ZWL can provide necessary innovation and impetus to HIPL’s brands while the large pharmacy
channel of ZWL and strong grocery channel of acquired HIPL can complement each other, thereby enabling distribution
level synergies.

1
Complete definitions of the ratings assigned are available at www.careratings.com and in other CARE publications.
1 Credit Analysis & Research Limited
 Press Release

Established marketing and distribution network: After the acquisition of HIPL, ZWL’s marketing and distribution network
has expanded to 46 ambient warehouses, 20 cold chain warehouses, around 65 C&F agents, over 1,500 distributors, over
2,000 field force and over 2 million customer touch points all over India. Also, presence of HIPL in the neighboring
countries provides opportunity to ZWL to push its product through the same distribution channel. ZWL is working on
supply chain management to rationalize its warehouses and distributor count without impacting its overall reach to gain
maximum synergy benefits.

Low leverage: ZWL’s leverage remains low marked by an overall gearing ratio of 0.46 times as on March 31, 2019. During
FY19, ZWL acquired HIPL for a consideration of around Rs.4,600 crore. ZWL issued NCDs of Rs.1,500 crore to part-fund the
acquisition. However, promoters along with institutional investors infused equity share capital of around Rs.2,575 crore
which led to strengthening of the tangible net-worth base to Rs.3,365 crore as on March 31, 2019 (including acquired
goodwill of Rs.3,797 crore as on March 31, 2019). Leverage of ZWL is expected to remain healthy as the company does
not envisage any debt-funded capex in near to medium term.

Key Rating Weaknesses

Lower than envisaged total income and profitability during H1FY20 along with modest debt coverage and return
indicators: Total income of ZWL grew by 216% during H1FY20 over H1FY19 mainly due to additional revenue from the
acquired brands of HIPL. On a full-year basis for FY20, the total income of ZWL is expected to remain lower than what was
previously envisaged. Moreover, the PBILDT margin also remained lower than envisaged at 15.67% during H1FY20 which
was mainly due to one-time expense of around Rs.38 crore related to the acquisition of HIPL and increase in the raw
material prices (i.e. milk and palm oil) which the company was unable to fully pass on to the consumers.
Further, due to decline in profitability, ZWL’s debt coverage indicators are expected to remain moderate marked by
interest coverage and Total debt/PBILDT of around 1.71x and 6.25 years respectively during FY20. Return indicators
marked by ROCE is also expected to remain modest at around 4% to 5% respectively during FY20 due to lower blended
profitability post acquisition which led to large addition in the total capital employed during FY19. However, comfort is
derived from the fact that as per the terms of debenture trustee agreement for the rated NCD, ZWL is required to
maintain ratio of financial indebtedness net off cash and cash equivalents to PBILDT on a consolidated half yearly (last
twelve months) basis at 4.25x and 3.75x as on March 31, 2020 and March 31, 2021 respectively and thereafter 3.25x till
March 31, 2024 which will entail build-up of liquidity in the company till the moratorium period on the NCD. ZWL is also
required to maintained interest coverage ratio at over 2 times.

Susceptibility of profitability margin to fluctuation in raw material prices and intense competition: ZWL faces intense
competition in most of its product categories from many reputed Multi-National Companies (MNC) and domestic
companies who have presence in multiple product categories. Although the majority of its products have retained their
market share, the “Complan” brand has been gradually losing its market share (from 12% in FY15 to 6% in FY19) during
last few years. Due to intense competition, the marketing expense of the company is expected to remain high. Palm Oil,
Sucralose, Aspartame, Stevia, Milk, Barley and Sugar are the major raw materials used by ZWL. Palm Oil prices and sugar
prices are highly volatile and their direction is determined by various government policies. Further, the price of milk also
remained volatile in H1FY20 which partly impacted the operating profitability of ZWL during H1FY20. The intense
competition restricts ZWL’s ability to fully pass-on the increase in the raw material prices to the customers.

Liquidity: Strong
Liquidity of ZWL is marked by current ratio of around 1.29 times as on March 31, 2019, efficient operating cycle along
with adequate cash and bank balance of around 170 crore as on September 30, 2019. Further, the repayment of NCDs
issued by ZWL starts from January 14, 2022 thereby giving it time to build-up sufficient cash accruals to service the debt.
The liquidity of the company is envisaged to be strong on the expectation of its access to timely need-based support from
its parent /promoters.

Analytical Approach: Consolidated along with ZWL’s strong linkages with its parent, CHL.
CHL holds 63.55% equity share capital in ZWL as on September 30, 2019. Promoters of CHL also held 4.06% equity share
capital in ZWL as on September 30, 2019. ZWL is strategically important for CHL to de-risk and diversify its operations.
CHL, having a strong credit risk profile, is capable of providing need-based financial assistance to ZWL in a timely manner
and the same has been articulated by the management of CHL. The companies considered in ZWL’s consolidation are
shown in Annexure-4.

Applicable Criteria:
Criteria on assigning Rating Outlook and Credit Watch
CARE’s Policy on Default Recognition
CARE’s methodology for manufacturing companies
Financial ratios – Non-Financial Sector
2 Credit Analysis & Research Limited
 Press Release

Rating Methodology: Factoring Linkages in Ratings

About the company

ZWL is engaged in the manufacturing, branding and distribution of health food and personal care products. Earlier ZWL
operated as a consumer product division of CHL. During June 2006, CHL acquired a majority equity stake in an already-
listed entity Carnation Nutra Analogue Foods Limited (Carnation). After acquisition of Carnation, CHL’s consumer product
division was de-merged from CHL and hived off to Carnation. Carnation was renamed as ZWL in 2009. ZWL sells its
products under three brands i.e. “Sugar-Free” (Sugar substitute), “Everyuth” (Skin Care) and “Nutralite” (Table spread)
which are well-established brands in their respective category.
In January 2019, ZWL, acquired HIPL, a wholly owned subsidiary of Heinz Italia SPA for a consideration of around Rs.4,600
crore. The deal comprised the acquisition of business of HIPL’s four brands Complan, Glucon-D, Nycil and Sampriti Ghee,
its two manufacturing units in Aligarh (Uttar Pradesh) and Sitarganj (Uttarakhand) and all operational assets and liabilities
along-with associated distribution network. The acquisition was funded through NCDs of Rs.1,500 crore and rest through
a mix of equity infusion and internal accruals.
(Rs. Crore)
Brief Financials (Consolidated) FY18 (A) FY19 (A)
Total Operating Income 535.51 *863.28
PBILDT 144.86 194.81
PAT 136.51 171.24
Overall Gearing (times) 0.04 0.46
Interest Coverage (times) 85.21 6.47
A: Audited; *FY19 includes only around 2 months of revenue from the acquired brands portfolio from HIPL
ZWL reported total operating income of Rs.953 crore and PAT of Rs.68 crore during H1FY20 (Un-Audited; UA) as against
total operating income of Rs.301 crore and PAT of Rs.68 crore during H1FY19 (UA).

Covenants of rated instrument/facility: Detailed explanation of covenants of rated instruments is given in Annexure-3

Status of non-cooperation with previous CRA: Not Applicable

Any other information: Not Applicable

Rating History (Last three years): Please refer Annexure-2

Annexure-1: Details of Instruments/Facilities

Size of the Rating assigned

Name of the Date of Coupon Maturity
ISIN No. Issue along with
Instrument Issuance Rate Date
(Rs. crore) Rating Outlook
Non-Convertible
INE768C07017 January 14, 2022 500.00
Debentures
Non-Convertible CARE AA+;
January 16, 2019 INE768C07025 9.14% January 16, 2023 500.00
Debentures Stable
Non-Convertible
INE768C07033 January 16, 2024 500.00
Debentures

Annexure-2: Rating History of last three years

Current Ratings Rating history

Name of the Type Rating Date(s) & Date(s) & Date(s) & Date(s) &
Sr. Amount
Instrument/Bank Rating(s) Rating(s) Rating(s) Rating(s)
No. Outstanding
Facilities assigned in assigned in assigned in assigned in
(Rs. crore)
2019-2020 2018-2019 2017-2018 2016-2017
CARE 1)CARE AA+;
Debentures-Non
1. LT 1500.00 AA+; - Stable - -
Convertible Debentures
Stable (31-Dec-18)

3 Credit Analysis & Research Limited

 Press Release

Annexure-3: Covenants of rated instrument

Financial Covenants 1. The ratio of financial indebtedness net off cash and cash equivalents to PBILDT (on a
consolidated half yearly (last twelve months) basis shall be as below
Date Net debt/PBILDT
March 31, 2020 4.25x
March 31, 2021 3.75x
March 31, 2022 3.25x
March 31, 2023 3.25x
March 31, 2024 3.25x
2. Interest service coverage ratio (on a consolidated half yearly LTM (last twelve month)
basis) shall be maintained above 2 times.
3. The ratio of financial indebtedness net-off cash and cash equivalents to shareholders’
fund (gearing) (on a consolidated basis) shall always be under 0.75 times.
The issuer shall pay penal interest at a rate of 0.25% on the outstanding amount of
debentures for the breach of the financial covenants.
Other Covenants 1. In the event of a rating downgrade in the credit rating of the debentures or the issuer
below ‘AA+’ by any rating agency having an outstanding rating on the debentures or the
issuers, the coupon of the debentures shall be revised upward by 0.25% for each notch
of such downgrade from the date of such downgrade.
2. Upon an event of default, the majority debenture holders shall have right to
accelerate the payment obligation of the issuer under the transaction documents,
including principal, accrued but unpaid interest, default interest, and any other amount
due under the transaction documents.

Annexure 4: List of entities Consolidated in ZWL

% Shareholding by ZWL as on
Sr. No. Name of the entity Nature of relationship
September 30, 2019
1 Liva Nutritions Limited 100.00% Subsidiary
2 Liva Investments Limited 100.00% Subsidiary
3 Zydus Wellness Products Limited 98.16% Subsidiary
4 Zydus Wellness International DMCC 100.00% Subsidiary

Note on complexity levels of the rated instrument: CARE has classified instruments rated by it on the basis of complexity. This
classification is available at www.careratings.com. Investors/market intermediaries/regulators or others are welcome to write to
care@careratings.com for any clarifications.

4 Credit Analysis & Research Limited

 Press Release

Contact Us
Media Contact
Mr. Mradul Mishra
Contact No.: +91-22-6837 4424
Email ID – mradul.mishra@careratings.com

Analyst Contact
Mr. Krunal Modi
Contact No.: 079-40265614/+91-8511190084
Email ID – krunal.modi@careratings.com

Business Development Contact

Mr. Deepak Prajapati
Contact No.: +91-79-4026 5656
Email ID – deepak.prajapati@careratings.com

About CARE Ratings:

CARE Ratings commenced operations in April 1993 and over two decades, it has established itself as one of the leading credit rating
agencies in India. CARE is registered with the Securities and Exchange Board of India (SEBI) and also recognized as an External Credit
Assessment Institution (ECAI) by the Reserve Bank of India (RBI). CARE Ratings is proud of its rightful place in the Indian capital market
built around investor confidence. CARE Ratings provides the entire spectrum of credit rating that helps the corporates to raise capital
for their various requirements and assists the investors to form an informed investment decision based on the credit risk and their own
risk-return expectations. Our rating and grading service offerings leverage our domain and analytical expertise backed by the
methodologies congruent with the international best practices.

Disclaimer
CARE’s ratings are opinions on the likelihood of timely payment of the obligations under the rated instrument and are not
recommendations to sanction, renew, disburse or recall the concerned bank facilities or to buy, sell or hold any security. CARE’s ratings
do not convey suitability or price for the investor. CARE’s ratings do not constitute an audit on the rated entity. CARE has based its
ratings/outlooks on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee
the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results
obtained from the use of such information. Most entities whose bank facilities/instruments are rated by CARE have paid a credit rating
fee, based on the amount and type of bank facilities/instruments. CARE or its subsidiaries/associates may also have other commercial
transactions with the entity. In case of partnership/proprietary concerns, the rating /outlook assigned by CARE is, inter-alia, based on
the capital deployed by the partners/proprietor and the financial strength of the firm at present. The rating/outlook may undergo
change in case of withdrawal of capital or the unsecured loans brought in by the partners/proprietor in addition to the financial
performance and other relevant factors. CARE is not responsible for any errors and states that it has no financial liability whatsoever to
the users of CARE’s rating.
Our ratings do not factor in any rating related trigger clauses as per the terms of the facility/instrument, which may involve acceleration
of payments in case of rating downgrades. However, if any such clauses are introduced and if triggered, the ratings may see volatility
and sharp downgrades.

**For detailed Rationale Report and subscription information, please contact us at www.careratings.com

5 Credit Analysis & Research Limited