Improved earnings visibility, debt pruning boost shares of Varun Beverages

Volume recovery, expansion in new geographies and debt reduction are key positives

Shares of Varun Beverages (VBL), which bottles and distributes PepsiCo’s range of beverages in India and a few others countries, are up more than 19 per cent in the past week as investors bet on the company’s improving earnings outlook after the strong beat in December quarter (Q4). Varun Beverages follows the January-December accounting year.

Net sales rose 9 per cent YoY in Q4 to Rs 1,331 crore against consensus estimate of Rs 1,294 crore. This was led by 6 per cent growth in volumes, which turned positive after two successive quarters of decline. Both domestic and global volumes saw faster-than-anticipated growth revival, despite challenges in on-the-go channel –accounting for 44 per cent of CY20 sales. Nepal, Sri Lanka, Morocco, Zimbabwe, and Zambia form part of the global operations.

Among categories, carbonated soft drinks (CSB) and water delivered 6 per cent and 12 per cent volume growth, respectively, while the juice portfolio (down 20 per cent in Q4) is seen recovering from Q1CY21 onwards, according to the management. Recent acquisitions are also seen supporting volume recovery. 

“Stronger recovery would result from Varun Beverages' effort in extending the distribution network in acquired territories in South/West and driving utilisation levels,” says Antique Broking in a recent report. Subsequently, the brokerage forecasts the company’s revenue and volume to deliver a compound annual growth rate (CAGR) of 25 per cent each during CY20-22.

Earnings before interest, tax, depreciation, and amortisation (Ebitda) jumped close to 50 per cent YoY to Rs 172 crore versus the expectation of Rs 124 crore, while the margin expanded by 350 basis points to 12.9 per cent, aided by sustained cost savings. With most of these benefits seen continuing in the quarters to come, the margin is likely to sustain at the current elevated levels, according to the company. 

Varun Beverages also reduced its debt on books to Rs 3,000 crore as of December 2020, from Rs 3,240 a year ago. With no major capex requirement in the near term, CY21 may see a further debt reduction. Market share gains and continued traction in international operations are other key tailwinds for the stock, say experts.

On Monday, even as the markets were weak, shares of Varun Beverages hit an all-time high of Rs 1,075 intraday, before ending with gains of 5.4 per cent. However, the sharp appreciation in the stock does not offer a favourable risk-reward. Investors are, therefore, advised to accumulate the stock on the decline.