Our view
Varun Beverages posted solid volume growth on a high base led by early onset of summer, no impact of Covid third wave, increase in mobility, enhanced portfolio offerings and strong international performance. Growth was even better in juices and other new launches like Sting and dairy with Out of Home channel displaying strong momentum and in-home consumption trends sustaining. High operating leverage helped improve EBITDA margins despite 30% PET cost inflation pushing down gross margins sharply. The company looks set to have a strong CY22 with a new greenfield unit in Bihar, benefits of new distribution infrastructure created in South and West markets in last couple of years, strong sales from newly launched categories and better international performance. As debt keeps coming down and cash position keeps improving, the company is looking at acquiring more territories from Pepsico mainly in Africa. Continued retail outlet expansion driving market share gains in CSD coupled with success in categories like dairy and energy drinks should remain key growth drivers. We believe the company is a good compounding story for the long-term with a growth potential in the mid-teens coupled with stable margins and return ratios. We maintain our ADD rating for now and would expect further re-rating once the company delivers on its aggressive growth plans on the markets acquired in South and West India in the next couple of years and we get more clarity on organic/inorganic expansion plans.
Result Highlights
- Result summary - Revenue/EBITDA/PAT growth of 26%/39%/98% led by robust volume growth of 18.7% on the back of early onset of summer. Volume sales stood at 179.7mn cases vs 151.4mn cases in Q1CY21. Realization per case increased 6.3% to Rs157.3/case. Revenue contribution for CSD/Juice/PDW stood at 70%/7.2%/22.8% similar to Q1CY21.
- Margins - Consolidated GM fell 430bps to 51.5% on the back of ~30% increase in preform prices in India. However, EBITDA margin improved 180bps to 18.8% led by operating leverage and higher realizations.
- Earnings - PAT almost doubled to Rs 2.7bn from Rs 1.37bn YoY driven by lower interest expense, lower cost of borrowings and higher margins.
- Management commentary - Confident of reporting robust performance in coming quarters driven by strengthening demand, penetration-led distribution which is in turn driving market share gains and success in new product categories.
Valuation
We increase our estimates to factor in higher revenue growth & margins and now build in revenue/EBITDA/PAT CAGR of 21%/30%/47% during CY21-CY23E led by a double-digit volume CAGR and gradual uptick in margins led by structural cost efficiencies. We maintain ADD rating on VBL with a revised TP of Rs 1,189 valuing the company at 32x CY23E earnings (10% premium to LPA) implying 18x EV/EBITDA for 28% average ROE.
Shares of Varun Beverages Limited was last trading in BSE at Rs. 1084.35 as compared to the previous close of Rs. 1059.05. The total number of shares traded during the day was 124901 in over 6970 trades.
The stock hit an intraday high of Rs. 1152.75 and intraday low of 1078.00. The net turnover during the day was Rs. 138808433.00. |
