 "Varun Beverages")
Shares of Varun Beverages (VBL) hit a new high of Rs 1,560.30, up 3 per cent on the BSE in Monday’s intra-day trade in an otherwise weak market on healthy growth outlook in the forthcoming years.
In past one month, the stock has outperformed the market by surging 24 per cent, as compared to 1.3 per cent rise in the S&P BSE Sensex. Further, in past eight months, the market price of VBL has more-than-doubled or zoomed 107 per cent. The stock is seen moving towards its pre-stock split all-time high price of Rs 1,747.15 touched on May 26, 2023. In June 2023, VBL had sub-divided face value of its equity shares from Rs 10 to Rs 5 per share.
A sharp rally in stock price has seen VBL’s market capitalisation (market cap) cross the Rs 2 trillion mark today for the first ever time. At 10:52 am; with Rs 2.01 trillion market cap, VBL stands at 43rd position in overall market cap ranking, BSE data shows.
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.
VBL’s management believes the peak season in calendar year 2024 (CY24E) will be stronger as it has augmented its capacity by 45.0 per cent vs. CY22 levels. The peak season also leads to higher sales of small packs, leading to better realizations on a per case basis.
As a result, VBL will benefit from higher volumes as well as realizations, which will lead to a strong topline performance in CY24E. Management has retained its earnings before interest, tax, depreciation, and amortization (EBITDA) margin guidance band at a conservative level of 20.0 per cent to 21.0 per cent vs 22.5 per cent seen in CY23 but hopes to deliver better margins.
The addition of BevCo will accomplish VBL’s stated goal of entering new territories for incremental growth and reducing seasonality. BevCo margins are lower vs. VBL’s current margins but there is scope for improvement due to operating efficiencies and proximity benefits from VBL’s operations in countries like Zambia and Zimbabwe, according to analyst KRChoksey Shares and Securities.
The brokerage firm said it continues to like VBL as it has significant growth potential in India as well as international markets led by distribution expansion, capacity expansion, entry into new territories and products, and a strong financial position. “We continue to value Varun Beverages at a P/E multiple of 65.0x on CY25E EPS of Rs 26.6 (Rs 23.2 earlier) and assign a target price of Rs 1,732 per share (Rs 1,505 per share previously). Accordingly, we maintain a BUY rating in the shares of VBL,” analyst said.
Analysts at Motilal Oswal Financial Services (MOFSL) expect VBL to maintain its earnings momentum, aided by increased penetration in newly acquired territories in India and Africa, higher acceptance of newly launched products, continued expansion in capacity and distribution reach, growing refrigeration in rural and semi-rural areas, and a scale-up in international operations.
While the brokerage firm maintains its CY24 earnings, it increased the CY25 earnings estimate by 7 per cent, on account of integrating the recently acquired South African beverage company BevCo’s financials (assumed only six months of integration in CY24) and also increasing the volume growth estimate of the existing business to 16 per cent/14 per cent for CY24/25 from 14 per cent/13 per cent earlier estimated.
However, higher interest cost led by an increase in debt (capex and acquisition led increase) partly offsets the increase in earnings, MOFSL had said in Q4 results update.
However, higher interest cost led by an increase in debt (capex and acquisition led increase) partly offsets the increase in earnings, MOFSL had said in Q4 results update.
