Why is Zydus Wellness falling/rising?

Recent Price Movement and Market Context

The stock has underperformed notably in the short term, falling 4.52% over the past week while the Sensex gained 0.50%. Over the last month, the decline is more pronounced at 10.24%, contrasting with the Sensex’s 1.66% rise. Although the year-to-date and one-year returns remain positive at 12.04% and 12.86% respectively, these gains are modest compared to the broader market’s performance. The five-year return of 18.12% also lags significantly behind the Sensex’s 93.43% surge, indicating a longer-term underperformance relative to the benchmark.

On the day in question, Zydus Wellness underperformed its sector by 2.04%, continuing a two-day losing streak that has resulted in a cumulative 2.61% decline. The stock’s price currently sits above its 200-day moving average but remains below its 5-day, 20-day, 50-day, and 100-day moving averages, signalling short-term weakness amid longer-term support levels.

Investor participation has also waned, with delivery volumes on 25 Nov dropping by nearly 25% compared to the five-day average. This reduced liquidity, although still sufficient for moderate trade sizes, suggests cautious sentiment among market participants.

Fundamental Performance and Valuation

Zydus Wellness maintains a robust ability to service its debt, with an average EBIT to interest ratio of 14.57, indicating healthy operational earnings relative to interest obligations. The company’s return on capital employed (ROCE) stands at 3.8%, and it carries an enterprise value to capital employed ratio of 1.9, suggesting a fair valuation framework.

However, the stock trades at a premium relative to its peers’ historical valuations, which may be a factor in investor caution. While the stock has delivered a respectable 12.86% return over the past year, this has been accompanied by an 8.4% decline in profits, signalling underlying operational challenges.

Institutional investors hold a significant 22.19% stake in the company, reflecting confidence from entities with greater analytical resources. Yet, this has not prevented the recent price weakness, possibly due to concerns over profitability trends and growth prospects.

Profitability Concerns and Growth Challenges

The company’s long-term growth trajectory appears subdued, with net sales increasing at an annual rate of 11.17% and operating profit growing only 4.33% over the past five years. More alarmingly, the latest quarterly results reveal a sharp deterioration in profitability. The quarterly profit after tax (PAT) stood at a loss of ₹18.60 crores, a decline of 123.1% compared to the average of the previous four quarters. Similarly, profit before tax excluding other income (PBT less OI) hit a low of ₹17.80 crores in the red, while earnings per share (EPS) dropped to a quarterly low of ₹-1.66.

These figures highlight significant short-term operational setbacks that have likely contributed to the recent share price decline. The combination of falling profits and premium valuation multiples may be prompting investors to reassess their positions, leading to the observed selling pressure.

Investor Takeaway

While Zydus Wellness continues to demonstrate solid debt management and maintains a fair valuation on certain metrics, the recent quarterly losses and subdued growth rates weigh heavily on investor sentiment. The stock’s underperformance relative to the Sensex and its sector, coupled with declining trading volumes, suggests a cautious outlook among market participants.

Investors should carefully monitor upcoming quarterly results and any strategic initiatives aimed at reversing the profit decline. Given the premium valuation and current earnings challenges, a prudent approach may be warranted until clearer signs of operational recovery emerge.

Limited Time Only! Subscribe for Rs. 12,999 and get 1 Year of MojoOne + an Additional Year Completely FREE. Don't miss out on this exclusive offer. Claim Your Free Year →