Varun Beverages - Strong volume growth along with margin improved; steep valuations - ICICI Securities

While Varun reported strong volume led (18.7% YoY) revenue growth of 26.2% YoY, it has also managed to improve EBITDA margins by 175bps due to cost saving initiatives and operating leverage. Key highlights: (1) New products i.e. Sting, value added dairy and Mountain Dew Ice are doing well, (2) It is in process to set up manufacturing unit for Kurkure Puffcorn which is likely to open up new revenue stream and (3) increase in out-of-home consumption provides strong tailwinds to the growth. The company operationalised its manufacturing facilities in Bihar and J&K during the quarter. We model Varun to report a PAT CAGR of 29.3% over CY21-23 with an improving RoE. While we remain positive on Varun's business model, the stock price upside is capped at current valuations. We downgrade the stock to HOLD with a target price of Rs1,030 (38x CY23E EPS).

- Q1CY22 results: Varun reported revenue and EBITDA growth of 26.2% and 39.1% YoY, respectively, in Q1CY22. Volume growth was 18.7% YoY and rest was due to higher net realizations per case. While the gross margin declined 427bps YoY due to rise in preform prices YoY, EBITDA margin was up 175bps YoY due to benefits of operating leverage and cost saving initiatives, in our view. PAT was up 98.2% YoY.

- Segment-wise performance: CSD, Juice and Packaged drinking water formed 70%, 7.2% and 22.8% of the company's volumes in Q1CY22 and reported growth of 18.9%, 18.2% and 20.6% YoY, respectively. Volume growth in both domestic and international markets was in higher than 16%

- Healthy growth across geographies: Varun reported broad-based growth across both domestic and international geographies. We note there was negligible disturbance in Nepal and Sri Lanka subsidiaries too. Its volume growth in Sri Lanka was ~37% YoY. In the domestic business, the company started the commercial production in Bihar and Jammu & Kashmir manufacturing facilities.

- New products driving growth: Sting and value added dairy contributed 7.5% and 0.5% of total sales in Q1CY22, respectively. We note these products are less than three years old. It indicates strong success of Varun's marketing efforts despite macro disturbances.

- Downgrade to HOLD: We model Varun to report revenue and PAT CAGRs of 13.8% and 29.3%, respectively, over CY21-CY23E. It continues to benefit from its relationship with PepsiCo, pan-India distribution, backward integration, and increase in in-home consumption. However, we believe at the current valuations (40x CY23E), the stock price upside is capped and downgrade the stock to HOLD rating with a DCF-based target price of Rs1,030 (38x CY23E).

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.

Source : Equity Bulls

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VarunBeverages INE200M01013 VBL Q1CY22 ResultUpdate ICICISecurities