Market share gains to support volume growth for Varun Beverages

Amid restrictions, the company is banking on higher in-home consumption, new launches to drive sales

The second wave of Covid-19 and resultant restrictions on movement could weigh on Varun Beverages’ prospects this summer. The impact for the national bottling partner of PepsiCo would be higher in Maharashtra as well as in the hotels, restaurants, and cafeteria, or Horeca, segment.

While most states have announced curbs, Maharashtra is contemplating stricter restrictions that could derail the rebound in the beverages market. Maharashtra accounts for 6-7 per cent of the firm’s sales. The other segment that could see impact from restrictions over hours of operation and capacity is Horeca, which contributes about 7 per cent to sales. 

Analysts at ICICI Securities, however, believe the company is better prepared to tackle the impact of the second wave than it was the first. In addition to strengthening its distribution and logistics, the company has been taking steps to encourage in-home consumption and has introduced the 1.25-litre pack. 

The firm has been gaining market share from smaller and unorganised players, given the shift towards packaged beverages. It has also increased its market share of PepsiCo’s volumes from 80 per cent to 85 per cent due to higher penetration in existing and acquired territories of South and West India in 2019. 

In addition to the traction in new territories, what helped the company’s volumes rebound was the success of its new launches. Analysts at Motilal Oswal Research say launches like Mountain Dew–Ice and ambient temperature dairy beverages under the Cream Bell brand are gaining traction. 

For FY20-22, the brokerage expects 28 per cent volume and revenue growth. Volume gains are expected to come from India as well as overseas markets (Morocco, Zimbabwe) which account for a fifth of its volumes. The operating profit, however, will be higher given operating leverage, while lower capex spending and higher margins should aid cash flows and bring down debt. Net debt, which is over Rs 3,000 crore (leverage ratio at 0.9 times) is expected to fall by two-thirds, taking the leverage ratio to 0.2 times over this period. 

At the current price, the stock, which has gained 54 per cent since the start of November, is trading at 31 times its CY22 earnings estimates. Investors can consider it for the long term on dips.