Zydus Wellness Ltd Upgraded to Hold as Technicals Improve Amid Mixed Financials

Quality Assessment: Mixed Financial Performance Amidst Operational Challenges

Zydus Wellness’s recent quarterly results for Q2 FY25-26 reveal a challenging financial environment, with profits declining sharply. The Profit Before Tax excluding other income (PBT less OI) fell to a negative ₹17.80 crores, representing a steep 121.3% drop compared to the previous four-quarter average. Similarly, the Profit After Tax (PAT) plunged by 123.1% to ₹-18.60 crores, while Earnings Per Share (EPS) hit a low of ₹-1.66. These figures highlight significant short-term operational pressures.

However, the company’s ability to service its debt remains robust, with an average EBIT to interest ratio of 14.57, indicating strong coverage and financial discipline. Return on Capital Employed (ROCE) stands at a modest 3.8%, signalling fair utilisation of capital but room for improvement. Over the last five years, net sales have grown at an annualised rate of 11.17%, while operating profit growth has been more subdued at 4.33%, reflecting moderate long-term expansion but limited margin enhancement.

Valuation: Premium Pricing Amidst Fair Capital Efficiency

The stock currently trades at ₹456.45, up 7.69% on the day, with a 52-week high of ₹530.55 and a low of ₹298.60. Despite recent profit declines, Zydus Wellness commands a premium valuation relative to its FMCG peers, supported by a low enterprise value to capital employed ratio of 2.0, which suggests reasonable capital efficiency. This valuation premium is underpinned by the company’s market cap grade of 3 and a Mojo Score of 54.0, which has improved from a previous Sell grade to Hold.

Investors appear to be pricing in the company’s market-beating returns and institutional confidence, with 22.19% of shares held by institutional investors who typically conduct rigorous fundamental analysis. The stock’s one-year return of 17.51% significantly outpaces the BSE500 index return of 6.41%, reinforcing its relative attractiveness despite earnings volatility.

Financial Trend: Profitability Under Pressure but Debt Servicing Remains Strong

The recent quarterly financials indicate a deterioration in profitability, with negative earnings and a sharp decline in PBT and PAT. This downturn contrasts with the company’s longer-term sales growth trajectory, which remains positive but modest. The negative quarterly earnings have weighed on sentiment, yet the company’s strong EBIT to interest ratio of 14.57 provides reassurance regarding its financial stability and ability to meet obligations.

While the ROCE of 3.8% is below industry-leading levels, it reflects a fair valuation when combined with the enterprise value to capital employed metric. The stock’s premium valuation relative to peers suggests that investors are factoring in potential recovery and the company’s strategic positioning within the FMCG sector.

Technicals: Bullish Momentum Drives Upgrade

The primary catalyst for the upgrade to Hold is the marked improvement in technical indicators. The technical trend has shifted from mildly bullish to bullish, supported by several key signals. On a weekly basis, the Moving Average Convergence Divergence (MACD) remains mildly bearish, but the monthly MACD is bullish, indicating longer-term positive momentum. The Relative Strength Index (RSI) shows no significant signal on both weekly and monthly charts, suggesting the stock is not overbought or oversold.

Bollinger Bands are bullish on both weekly and monthly timeframes, signalling upward price volatility and potential for further gains. Daily moving averages are bullish, reinforcing short-term strength. The Know Sure Thing (KST) indicator is mildly bearish weekly but bullish monthly, while Dow Theory assessments show a mildly bullish weekly trend despite a mildly bearish monthly outlook. On-Balance Volume (OBV) is mildly bearish weekly but bullish monthly, indicating accumulation over the longer term.

These mixed but predominantly positive technical signals have contributed to the stock’s recent price appreciation, with the current price at ₹456.45 compared to the previous close of ₹423.85 and a day’s high of ₹482.25. The stock’s weekly return of 7.27% and monthly return of 6.27% significantly outperform the Sensex, which declined marginally over the same periods.

Comparative Returns and Market Context

Over the past year, Zydus Wellness has delivered a 17.51% return, nearly double the Sensex’s 9.06% gain. Over three years, the stock has appreciated by 51.30%, outperforming the Sensex’s 40.07%. However, over five and ten years, the stock’s returns of 14.76% and 167.04% respectively lag behind the Sensex’s 78.47% and 226.30%, reflecting some longer-term underperformance relative to the broader market.

This mixed performance underscores the importance of the recent technical upgrade and valuation reassessment, which may signal a turning point for the company’s stock trajectory.

Outlook and Investment Implications

The upgrade to Hold reflects a nuanced view of Zydus Wellness’s prospects. While recent quarterly earnings have disappointed, the company’s strong debt servicing ability, fair valuation metrics, and improving technical momentum provide a foundation for cautious optimism. The stock’s premium valuation relative to peers suggests that investors are pricing in a recovery or strategic growth initiatives that could enhance profitability.

Institutional investors’ significant stake of 22.19% indicates confidence in the company’s fundamentals and long-term potential. However, investors should remain mindful of the earnings volatility and moderate long-term growth rates, particularly in operating profit margins.

Given the mixed signals from financial trends and technicals, the Hold rating is appropriate, signalling that investors should maintain positions but await clearer signs of sustained earnings recovery before considering a more bullish stance.

Summary of Ratings and Scores

Zydus Wellness currently holds a Mojo Score of 54.0, upgraded from a previous Sell grade to Hold as of 31 December 2025. The market cap grade is 3, reflecting mid-tier market capitalisation within the FMCG sector. Technical grades have improved notably, with the overall technical trend now bullish. The company remains a member of MarketsMOJO’s thematic lists, reflecting its relevance in the FMCG space.

Investors should monitor upcoming quarterly results and technical developments closely to reassess the stock’s trajectory and potential for further upgrades.

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