Varun Beverages outperforms, up for 4th day in a row; analysts upbeat

Analysts believe VBL is expected to continue its strong growth momentum, which will be led by Normalcy of operations and market share gains in newly-acquired territories (post COVID-19 disruptions).

Shares of Varun Beverages (VBL) surged 5 per cent to Rs 973.05, hitting a new high on the BSE in Tuesday’s intra-day trade amid expectations of the company continuing its strong growth momentum. The stock of Pepsi India bottler was quoting higher for the fourth straight day and rallied 7.5 per cent during the period.

The stock surpassed its previous high of Rs 941.60 touched on September 5. In comparison, the S&P BSE Sensex was down 0.08 per cent at 65,972 at 11:51 AM. The benchmark index has slipped 1.3 per cent in past four trading days. Meanwhile, thus far, in the calendar year the stock zoomed 70 per cent.

VBL is a key player in beverage industry and one of the largest franchisee of PepsiCo in the world (outside USA). The company produces and distributes a wide range of carbonated soft drinks (CSDs), as well as a large selection of non-carbonated beverages (NCBs), including packaged drinking water sold under trademarks owned by PepsiCo.

PepsiCo CSD brands produced and sold by VBL include Pepsi, Pepsi Black, Mountain Dew, Sting, Seven-Up, Mirinda, Seven-Up Nimbooz Masala Soda and Evervess. PepsiCo NCB brands produced and sold by the company include Slice, Tropicana Juices (100 per cent and Delight), Seven-Up Nimbooz, Gatorade as well as packaged drinking water under the brand Aquafina.

In June, VBL sub-divided face value of equity shares in the ratio of 1:2 i.e. 1 equity share of face value of Rs 10 each, into 2 equity shares of face value of Rs 5 each. The rationale behind the split was to enhance liquidity of the company's equity shares and to encourage participation of small investors by making equity shares of the company more attractive to invest.

Meanwhile, for April to June quarter (Q2CY23), VBL maintained its growth trajectory and showed strong signs of sustained profitability, despite facing a soft demand environment in India due to abnormally high unseasonal rains throughout the quarter. The company delivered a robust performance with growth in revenue by 13.3 per cent and EBITDA by 23.2 per cent YoY, as international territories showed strong momentum.

The softening in key raw material prices further catalysed the Gross margin expansion by 196bps to 52.5 per cent (primarily due to softening of PET chips prices) and EBITDA margins expansion by 210bps to 26.9 per cent (driven by higher gross margins and operational efficiencies).

The management said the company witnessed slower-than-anticipated demand due to unseasonal rains, they remain optimistic about full-year performance, especially considering the lower seasonality in the company’s business following the integration of West and South territories.

Analysts at Bonanza Portfolio maintain positive outlook in VBL on the back of strong market position backed by robust expansion plans in place and strong network and supply chain, along with visible growth trajectory. The stock, however, is trading above brokerage firm target price of Rs 929 per share.

Analysts at Axis Securities believe VBL shall continue its strong growth momentum, which will be led by Normalcy of operations and market share gains in newly-acquired territories (post COVID-19 disruptions). The management’s continued focus on the efficient go-to-market execution in acquired and underpenetrated territories as reflected in its recently commissioned Bihar plant operations (it has started gaining market share), Expansion in its distribution reach to 3.5 Mn outlets in CY23 from 3 Mn currently, Focus on expanding high-margin Sting energy drink across outlets coupled with increased focus on expansion of value-added Dairy, sports drink (Gatorade) and Juice segment, and Robust growth in the International geographies led by focused execution.