New categories, India growth to drive Varun Beverages' revenue trajectory

Asahi tie-up, India growth, Africa expansion and new categories such as dairy, energy drinks and snacks are expected to diversify Varun Beverages' revenues and support long-term growth

The recent agreement of Varun Beverages (VBL) with Japan’s Asahi Group Holdings, following the agreement reset with PepsiCo last month, will diversify VBL’s revenues. The tie-up will help VBL expand its portfolio beyond the core carbonated-drinks franchise into a new adjacent category. Though the contribution from the tie-up is expected to be small initially, with two products to be introduced in the second half of the current year, gradual scaling up and multiple product introductions across categories could become a major contributor to earnings. While the stock (currently at Rs 507) has gained 27 per cent after the strong Q4 earnings and a new PepsiCo contract, growth in the Africa region, in addition to capacity expansion and scaling up of new categories such as dairy products, energy drinks and snacks, is expected to drive sustainable long-term growth.

 

The near-term trigger for the stock is the tie-up, which will lead to the launch of a ready-to-drink, non-alcoholic, non-carbonated, dairy-based beverage under the Calpis brand in two flavours. While Asahi will lead product development and provide technical support for production, its local subsidiary will oversee marketing and brand management. VBL will handle manufacturing, distribution and sales.

 

While the near-term earnings impact will be minuscule, given the limited launches, Axis Capital’s Anand Shah and Harish Advani point out that each incremental non-PepsiCo brand de-risks single-franchise dependence and widens the addressable market. This is a diversification opportunity and acts as a credible re-rating trigger, they add. The brokerage has maintained an add rating with a target price of Rs 585.

 

The agreement with Asahi was enabled by a revised agreement between VBL and PepsiCo, which not only extended the term to 2049 but, more importantly, removed a restriction that stopped VBL from undertaking any business activity other than as a special-purpose vehicle for PepsiCo’s business. This materially enhances VBL’s strategic flexibility, allowing it to transition from primarily a bottler to a diversified F&B player.

 

VBL can now look at categories such as snacks and alcoholic beverages, which are a natural extension of VBL’s existing distribution and execution strengths, while the alcoholic beverages segment in India may be less attractive due to regulatory complexities and relatively limited distribution synergies.

 

Given the promoters’ ambition and strong execution track record, Kotak Research’s analysts, led by Jaykumar Doshi, believe that VBL is well positioned to unlock new growth engines and gradually evolve from a pure-play bottler into a broader F&B company through both organic and inorganic initiatives in the medium to long term. After the de-rating the stock witnessed in the past couple of years, this development represents a potential re-rating trigger for the stock, they add. The brokerage has an add rating with a target price of Rs 540.

 

What allayed investor worries (related to growth and competition) was the company’s March-quarter performance. It was a strong showing, with volumes and value growth of the India beverages business rising 14.4 per cent and 12.7 per cent, respectively. Operating profit also came in strong at 16 per cent. Further, net realisation per case improved 1.6 per cent at the consolidated level, fuelled by realisation growth in international territories. The company is well placed for healthy Q2CY26 growth due to the El Niño-led heatwave, along with tailwinds from the Twizza and Crickley consolidations.

 

Citi Research believes that the India outlook is encouraging, given strong volume growth in April, with further upside from an intense summer, limited realisation impact despite pack upsizing, and near-term margin gains from positive operating leverage. While competition from Campa persists, new launches, along with strong execution in distribution, visi-cooler expansion and manufacturing capacity, reinforce the positive view, says the brokerage, which has a buy rating with a target price of Rs 640.