Buy The Stock Of This PepsiCo Franchisee For 25% Returns, Says Emkay Global

Strong delivery enhances confidence in growth

“Varun Beverages revenues was 10-13% ahead of our/Street estimates. Adjusted for Rs 408 million one-off tax penalty in top-line, margins were in line with estimates. Op. leverage, led by 2-year volume CAGR of 11%, helped offset the 200bps gross margin decline due to PET price increase,” Emkay Global has said.

Except for the Covid-impacted May-Jun’21 period, Varun Beverages has seen strong double-digit volume CAGR in rest of YTD CY21. Category-wise, Water/Juices saw a healthy 7-9% CAGR and Carbonates saw a higher 12% CAGR on strong traction in energy drink Sting.

Expansion to help

Varun Beverages indicated Rs 4.8 billion capital expenditure for a bottling plant in Begusarai (Rs2.9bn) to better service the under-penetrated Bihar market and a pre-form plant in J&K (Rs1.9bn) to build back-end efficiencies, in the next two quarters.

“Varun Beverages has reduced its debt by Rs 6 billion in CY21 to date. Potential market share gains, led by Varun Beverages operational excellence and lower per-capita spending on hydration in India, drive our long-term growth confidence in Varun Beverages.

“The focus on growth leads to an improvement in our long-term growth expectations, albeit at the cost of a slight moderation in our profitability estimates. We maintain Buy with a target price of Rs 1,120 (35x Dec’23E EPS vs. Sep’23E earlier). Our multiple is backed by a 2-stage growth model,” the brokerage has said.

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