Varun Beverages Ltd - Q1CY21 Result Update - YES Securities

Strong delivery on both volumes and margins; COVID disturbance in peak season could provide entry opportunities

View - We continue to like the stock for its strong growth delivery despite weak out of home consumption and continued product portfolio expansion, opportunities for further penetration-led growth especially in West and South markets, strong traction in international territories, potential in non-cola categories and juices and a solid balance sheet and margin profile. Given another COVID-led disruption in its peak sales season, there is a risk of CY21 sales also being impacted driving some earnings downgrades. The stock is trading at 15x CY22 EV/EBITDA and 30x P/E and we believe it can slowly move towards a P/E of 35x, indicating about 20% upside from current levels.

Management commentary - Supportive macros drove 34% volume growth in India and 26% in international markets; PAT growth of 128% led by higher operating leverage, cost optimization measures and increase in international margins; debt reduction of 600crs yoy and lower interest rates helped; noticeable demand recovery in 1Q but pandemic can impact near-term demand, but medium-term outlook remains strong; declared 1:2 bonus.

Result highlights - Revenue growth of 34% with 33% volume growth on a low base and improved demand, 25% organic volume growth indicating 12% 2-yr CAGR, realizations up by 0.6% to Rs 148 given higher juice and CSD contribution, CSD contribution 70% and water 23%, GMs down 290bps due to change in product mix despite marginal saving in sugar and PET prices, EBITDA margins up 90bps to 17% give cost rationalization initiatives, interest cost down by 33%.

April performance - No supply chain issues given adequate stock availability, lockdown in few states started impacting at end-April which increases uncertainty about near future; some channels like hotels, restaurants shut again but last year's learnings are helping manage the situation better; rural markets are doing much better than large cities.

Input price environment - Sugar prices were flattish, PET resin prices have gone up but company already covered till Sep-Oct so will not impact gross margins; expect stable EBITDA margins as of now.

Key growth drivers - Product portfolio expansion - Energy drink Sting price rationalization has been a big driver (grew 2.5x in CY20 and crossed that volume in 1Q itself), new variant of Mountain Dew Ice lemon juice also doing quite well, Tropicana juices also doing well post launch in PET format; GTM continued to improve with increasing outlet reach.

South & West acquired territories update - Have added more people, vehicles and visi- coolers to ramp-up growth in South & West markets; now growing at similar to company average rates which is below expectations; growth will pick up only once the pandemic subsides; both are slightly more mature markets than North and East but growth would be driven by market share gains for next couple of years as only 50-60% outlet reach is there.

Capex outlook - Given no major expansion plans, capex will remain below annual depreciation levels; might need some expansion in juices.

Out of Home consumption - Proportion of OOH down from 40% historically to 20% now, so confident of improved growth trajectory once OOH starts recovering; higher in-home consumption is continuing even after OOH picking up.

Higher other expenses - In addition to sales growth, have written off some assets worth 16cr like a glass line and some plastic molds.

Zimbabwe profitability - Confident of continued margin expansion over next few quarters in Zimbabwe business due to reducing currency exposure and write-back of earlier provisions.

Juices update - Getting benefit from strong retail distribution network to place juices in smaller and rural markets especially in recently launched PET bottles.

Shares of Varun Beverages Ltd was last trading in BSE at Rs.1003 as compared to the previous close of Rs. 1003.7. The total number of shares traded during the day was 47789 in over 2937 trades.

The stock hit an intraday high of Rs. 1055.4 and intraday low of 990. The net turnover during the day was Rs. 48650264.

Source : Equity Bulls

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