While health drinks such as Complan and Horlicks earn decent margins, their sales growth has slowed down. Their owners are therefore selling out even as competition is getting tougher. If the Complan deal is any indication, valuations are facing a dose of reality.
The message for the Horlicks maker in the Complan deal
In FY18, the Heinz India Pvt. Ltd brands being acquired—Complan, Nycil, Glucon-D and Sampriti—earned revenues of ₹1,130 crore. Revenues in the four quarters ended June is similar at ₹1,150 crore, with an Ebitda (earnings before interest, tax, depreciation and amortization) margin of 19.7%. This is only slightly lower than the 21.7% that Horlicks’s owner GSK Consumer Healthcare Ltd earned in this period.
The Heinz brands fetched ₹4,595 crore, much less than the $1 billion number mentioned earlier in June (or ₹6,800 crore). The price to sales ratio works out to 4 times and the enterprise value/Ebitda ratio is 20 times. GSK Consumer’s respective figures are 6.6 times and 30 times. Heinz also fetched less on this front.
Heinz sales growth has been unimpressive in recent years (see chart). Of course, demonetisation and rollout of the goods and services tax (GST) may have played a part. But a bigger concern is a slowing market for health drinks. Changing consumer preferences, competition and threats from alternatives are the main reasons. Also, pharmaceutical companies are moving in on this market.
Why would Zydus Wellness Ltd (along with Cadila Healthcare Ltd) acquire Heinz India business then? It acquires scale in one shot. In FY18, Zydus’s revenues were ₹503 crore, and the acquisition adds ₹1,130 crore, tripling its revenues. It ties in with its existing portfolio of products such as Sugar Free, Ever Yuth, Nutralite and Actilife.
But the challenge of a slowing market remains. How Zydus tackles this will determine if the acquisition pays off in the long run. It expects the acquisition to add to earnings in the first year, but effect on balance sheet and profitability may still be felt.
To know that better, the deal structure is required. Zydus has a net worth of ₹704 crore and cash of ₹177 crore, insufficient to fund the acquisition. That’s why it needs support from Cadila and private equity funds. Will it get a paltry stake as a result? Who will hold what equity stake? How much debt is to be raised? These are crucial unanswered questions.
Zydus shares fell by 4.3% while Cadila’s shares fell by 5.2% on Wednesday. The acquisition may hold a message for GSK Consumer’s investors as the company is up for sale. Its sales growth has slowed down and it also faces similar market challenges. Heinz’s valuation indicates a buyer may be unwilling to pay what a portfolio investor is. What if it’s not Heinz that got undervalued but GSK Consumer that was overvalued?