Varun Beverages' stock correction overdone; growth prospects strong

Having slumped 33 per cent from its three-month highs, the stock of Varun Beverages has recouped half of those losses over the past fortnight. The drop in stock prices was due to concerns related to competition and slower volume growth in the India business. The stock is currently trading at Rs 507 a share.

 

However, the Street believes that the correction is overdone and that the company has multiple growth opportunities in India and the African market. Further, there could be a near-term volume surge given the onset of the summer season, which is the peak period for the Pepsi bottling and distribution major.

 

The key concern weighing on the stock is increased competitive intensity with the relaunch of Campa Cola by Reliance Consumer Products (RCPL) in March 2023. Given that RCPL expects sales to cross Rs 1,000 crore in FY25, this would translate to about 70 million cases and a low single-digit market share, believes JM Financial Research. The overall Indian market is 2.4 billion cases, dominated by Coca-Cola and PepsiCo, which have a combined share of 80-85 per cent.

 

While Campa Cola is scaling up in terms of visibility, Elara Capital believes that this is restricted mainly to its disruptive Rs 10 (200ml) offering. Amit Purohit of the brokerage points out that the impact is more on local/regional brands than incumbents such as Pepsi and Coca-Cola in the near term. While Campa Cola’s aggression, especially in orange and cola flavours, is notable in key regions, its long-term success hinges on execution, which remains a challenge, he adds. A significant part of VBL’s revenues comes from brands such as Mountain Dew and Sting, which do not seem to be affected by Campa Cola.

 

Campa, according to JM Financial Research, has focused on certain states such as Tamil Nadu, Andhra Pradesh, Telangana, Uttar Pradesh, and West Bengal. The strategy is to target mass-end consumers who are price-sensitive and less brand-loyal through aggressive pricing. Analysts led by Mehul Desai of the brokerage highlight that the offtake is largely in smaller SKUs and out-of-home consumption, which is price-sensitive and not brand-loyal, where PepsiCo and Coca-Cola did not have an offering. In the large SKUs (750ml/2.25L), which are primarily for home consumption, PepsiCo and Coca-Cola remain strong, they add.

 

What should drive near-term growth are new launches and a strong summer season. The company is targeting double-digit growth for its India and international operations.

 

Sharekhan Research expects the company to post sales and net profit growth of 18-27 per cent annually over CY24-26. What will drive this growth is stable performance in the domestic market, better distribution reach (10-12 per cent annual outlet addition), expansion of the snacks portfolio outside India, increased penetration in newly acquired African territories, and commissioning of multiple greenfield and brownfield facilities across geographies. The brokerage is positive on the stock and expects an upside of 41 per cent over the next 12 months.

 

Though Elara Securities has cut its earnings estimates for CY25 and CY26 due to lower margins, it states that within its FMCG universe, VBL offers a better growth trajectory through CY24-27 at an earnings growth rate of 17 per cent. It has reiterated an ‘accumulate’ rating with a target price of Rs 555.

 

JM Financial Research has a ‘buy’ rating, as VBL has multiple growth levers in the domestic business (capacity, distribution, and portfolio expansion), and the Africa opportunity remains large and intact. The brokerage believes that the recent correction is overdone and that the prevailing market pessimism should be viewed as an opportunity to add the stock (target price Rs 675) to portfolios.