Varun Beverages 3QCY20 results and investor call takeaways - progressive recovery through the quarter; limited capex to drive better return ratios - YES Securities

Result Highlights - +3.6% revenue growth despite -4.0% vol growth (India vol -6.7%, International vol +5.8%). Margins up 240 bps despite 150 bps decline in GMs due to cost rationalization and lower A&P spends. Reduced finance costs further enabled PAT growth of +99%. Better realization due to higher mix of CSD (75% vs 70% YoY). Faster than expected recovery with Sept month registering +12.9% growth YoY with rural and semi-urban areas contributing meaningfully in latter half of 3QCY20.

Outlook - Demand momentum to sustain in the months ahead due to better monsoon and govt measures.

Consumption - In home consumption has grown 20-25% YoY and is expected to sustain. Expect on-the-go consumption to come back and in home consumption to stay.

Operations - All facilities at near normal levels.

Trend of recovery in volumes - Jul -20%, Aug -7%, Sept +13%

Margin guidance - Margins to sustain between 18-21% with portion of cost benefits to continue in coming years.

Visicoolers - Addition of 40k visicoolers every year over the medium term.

New territories - Strengthen presence in newly acquired territories; to add distributors and enhance distribution network.

Seasonality factor - New territories in South and West have lower seasonality effect.

International markets - African markets opened faster than India. Very little lockdown in International markets. Margins have improved due to higher volumes and lower costs. Debt - Debt stands at INR 28.4 bn as on 3QCY20.

Capex - Spent INR 4 bn upto 9MCY20. Minimal capex to be incurred in 4Q.

Valuation & View - The stock is currently trading at 21x CY22E earnings and should do well going forward given a strong recovery in demand momentum, stable margins and limited capex which should bring down leverage and drive a strong gradual improvement in return ratios.

Shares of Varun Beverages Ltd was last trading in BSE at Rs.672.6 as compared to the previous close of Rs. 672.75. The total number of shares traded during the day was 15830 in over 1566 trades.

The stock hit an intraday high of Rs. 682.2 and intraday low of 663.45. The net turnover during the day was Rs. 10680981.

Source : Equity Bulls

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