Multiple challenges ahead for Varun Beverages as it eyes alcobev market

The move opens a larger addressable market but analysts see state-level regulatory complexity, limited distribution synergies and weak near-term earnings contribution

Shares of Varun Beverages Ltd (VBL) fell 4 per cent on Wednesday to ₹421 after the company’s announcement of its entry into the alcoholic beverages (alcobev) market met with a lukewarm response from investors. The stock lost another 0.5 per cent to end at ₹419.7 on Thursday.

 

The company is one of the largest franchises of PepsiCo outside the United States and it is setting up a subsidiary, KIVA Spirits, focussed on the ready-to-drink and alcoholic beverages market in India. Prathmesh Mishra, a former executive of Diageo, will be the managing director and chief executive officer of KIVA Spirits. VBL also announced a joint venture in Tunisia for manufacturing and distributing carbonated soft drinks, juices, water, and dairy products.

 

While these steps will expand the company’s revenue stream and market size, investors will look for signs that the Indian business is recovering. Weak performance in India is weighing on the stock, which has lost a fifth of its value in the last three months. In comparison, the BSE 100 was up 2.3 per cent.

 

Investors will also seek clarity on VBL’s manufacturing, distribution, partnerships, acquisitions, capital expenditure needs and the segments it is targeting. J P Morgan Research expects the new alcohol venture to start small — likely targeting premium ready-to-drink products — before scaling up as it navigates complex state approvals, high working-capital needs, and strict advertising bans. 

 

J P Morgan analysts led by Latika Chopra noted that margins will be another key factor to watch. While VBL’s 25-plus per cent Indian operating margin outpaces the mid-to-high teens seen at listed spirits makers like United Spirits and Radico Khaitan, a focus on premium products — the market’s fastest-growing segment — could support profitability over time. The brokerage does not expect a meaningful earnings contribution by VBL in CY26. It has an overweight rating on the stock with a price target of ₹530.

 

Several brokerages warned of multiple challenges as VBL enters the tightly regulated alcohol market. While the move expands its addressable market by ₹80,000 crore, it is far more complex than its core ₹60,000-crore carbonated soft drinks business.

 

Kotak Institutional Equities cited state-level regulatory hurdles, limited operational synergies and intense competition as primary challenges. VBL will need to carve out a niche against established giants such as Diageo, Pernod Ricard, AB InBev, United Breweries (Heineken), Carlsberg and Radico Khaitan.

 

Given the separate licensing, warehousing and route-to-market requirements for alcohol, VBL will find limited synergy with its existing soft drinks network. However, the biggest hurdle remains state-specific regulations, pricing controls and taxes, which will create uneven profitability across regions. VBL may need to build adequate scale state by state to manage local taxes — a move that could dilute margins. While long-term growth potential exists, disciplined capital allocation will be critical to creating value, according to Kotak Research.

 

While the alcohol venture will take time to scale, attention remains on VBL’s core Indian revenue, which has been sluggish. June-quarter revenue rose just 13 per cent year-on-year, failing to deliver a sharp recovery despite a weak base from the previous year, when heavy unseasonal rains hit soft drink sales. This year’s performance came despite a hotter-than-usual summer across the country.

 

Goldman Sachs Research analysts led by Arnab Mitra trimmed their earnings estimates and target price for VBL after the company’s results. They reduced VBL’s earnings per share estimates by 2 to 5 per cent for 2026, 2027 and 2028, citing the lower-than-expected growth in the India business. They cut the target price to ₹550 from ₹600.