Varun Beverages' growth hinges on recovery; outlook stays positive

Even as June quarter volumes and sales performance of Varun Beverages Ltd (VBL) disappointed the Street, higher margins helped boost bottom line.

 

Net profit of the beverage major was up 5 per cent year-on-year (Y-o-Y) though sales slipped 2 per cent and operating profit was flat.

 

Brokerages are positive on the outlook and expect mid-teens earnings growth over the FY24-26 period. The stock of the carbonated soft drinks company is up 9 per cent over the past month.

 

Consolidated revenue and volume of the company saw a 2-3 per cent fall over the year-ago quarter due to unseasonal rains in India.

 

The unfavourable weather led to India revenues dropping by 9 per cent while volumes in the domestic market slid by 7 per cent.

 

What helped support the overall show was the international business, which posted a strong volume uptick of 15 per cent and accounted for about a fifth of consolidated revenues in the quarter.

 

International revenues were boosted by better availability and traction in the Africa region, especially South Africa.

 

Overall realisation was up 0.5 per cent Y-o-Y to ~180 per case and was led by a 6.6 per cent Y-o-Y improvement on the back of currency tailwinds in the international business and a 1.7 per cent decline in India business.

 

The India decline was on account of a 200 basis points (bps) Y-o-Y increase in packaged water to the overall mix.

 

What should help sustain the growth momentum is the successful acquisition of South African bottler BevCo. This will strengthen Varun Beverages’ footprint in South Africa and expansion in the Democratic Republic of Congo.

 

The expansion of its snacks portfolio beyond India, particularly in Zimbabwe and Zambia, too, is expected to boost overall growth.

 

Despite a weak June quarter, the company expects a recovery in the second half of the year.

 

What should help it effectively cater to demand are commissioning of new facilities, expansion into high potential markets and sustained investments in distribution assets (visi-coolers).

 

Though there were growth headwinds during the quarter, operating profit margins expanded 82 bps Y-o-Y to 28.5 per cent.

 

The gains came in despite elevated fixed costs from newly commissioned greenfield plants that are yet to ramp up volumes.

 

Margin improvement was supported by operational efficiencies, stronger international currencies, and deeper backward integration.

 

Most brokerages have a positive outlook on the company. Despite temporary disruption from unseasonal rains during peak summer, Axis Securities believes that VBL’s structural growth drivers remain intact.

 

Preeyam Tolia and Suhanee Shome of the brokerage have maintained a ‘buy’ rating as they expect the company to sustain strong momentum over the medium-to-long term. 

 

Antique Stock Broking also has a ‘buy’ rating, citing expansion into new geographies and the various categories of snacks as reasons that will aid profitability.

 

Manish Mahawar and Aditya Mehta of the brokerage believe that growth in emerging categories and dairy products combined with capacity expansion will support volume and margin expansion.

 

ICICI Securities, however, has a ‘hold’ rating on the stock. The management remains optimistic on volume recovery in the second half supported by a low base in India and margin improvement.

 

But analysts led by Dhiraj Mistry of the brokerage are cautious, given the rising competitive intensity, which could restrict the medium-term performance.