Varun Beverages - 1QCY22 Result Update - Strong Growth ahead; Re-rating to Continue

Mr. Mitul Shah, Head of Research at Reliance Securities.

Varun Beverage's (VBL IN) net revenue from operations grew by 26% YoY and 63% QoQ to Rs28.3bn (broadly in line with our estimate of Rs28bn) primarily supported by strong volume growth and higher realization. Realization per case stood at Rs157 (up 6% YoY and up 1% QoQ) due to price hike in selected SKUs, favorable mix and improvement in realization in the international markets. Total sales volume grew by 19% YoY to 180mn cases, led by resumption of the day-to-day activities, early onset of summer helping out of home purchases widely. Moreover, strong performance in international markets with 31% YoY growth aided overall volume performance. Of the total volume, CSD constituted ~70% (up 85% QoQ), juice ~7% (up 117% QoQ) and water ~23% (up 8% QoQ). EBITDA increased by 39% YoY and 156% QoQ to Rs5.3bn (15.7% above our estimate) in 1QCY22 due to price hike and operating leverage. EBITDA margin stood at 18.8% (up 175bps YoY and up 681bps QoQ). Net profit stood at ~Rs2.7bn (up 98% YoY and up 732% QoQ), 19.5% above our estimate of Rs2.3bn in 1QCY22. Despite seasonally weak quarter, an improvement in profitability of international operations and lower financing cost led to strong net profit. Finance cost in 1QCY22 declined by ~19% due to the lower average cost of borrowing. The company continued to reduce its debt and lower its average cost of borrowing as part of its debt-reduction strategy. In view of healthy volume growth, backed by new geographies post acquisition, new products, backward integration, margin expansion and healthy return ratios, we maintain our BUY rating on VBL, with a revised 1-year Target Price of Rs1,300 (earlier Rs1,060), valuing the stock at a P/E of 37x CY23E EPS.

Drivers in Place for New Season Growth

In 1QCY22, demand trends were balanced across the rural and urban regions, with an improvement in mobility, and on-the-go consumption is back to the normalized level. New acquired territories South and West India regions continued to perform well contributing to ~1/3rd of the volumes. VBL had increased product prices on selected SKUs in the last week of Dec'21 to mitigate the impact of higher prices of PET and to control inflationary headwinds, which were reflected in 1QCY22 margins. Though in the last 2 years, due to the Covid pandemic, VBL has lost its major seasons, management is expecting a major volume growth in 2QCY22. The management guided for EBITDA margin of ~20-21% for CY22. All premium products like Sting, Tropicana and dairy products are growing strongly. Going forward, major growth drivers include 1) higher rate of acceptance of the newly launched products; and 2) continuous focus on the distribution network. Thus, we expect VBL to clock a sales volume CAGR of 17% over CY21-CY23E.

Reiterate Buy; Attractive Valuation

Considering improving macros, a growing sense of normalcy across the domestic and international markets, onset of early summer, elevated temperature situation and network expansion would lead to a strong volume growth, especially in the domestic markets. The revenue growth is expected to be driven primarily by volume growth because of the penetration into wider geographies, especially in Southern, Western and Eastern regions of India and higher realization from the international markets. Timely price hike and operating leverage with a robust volume growth will support EBITDA and net profit. Hence, we raise EBITDA and PAT estimates by 10%/14% and 13%/23% for CY22E/CY23E, respectively. We expect VBL's earnings to clock 43% CAGR over CY21-CY23E. Considering the better business visibility, healthy operating environment and 43% earnings CAGR, we maintain our positive view with higher target multiple of 37x on CY23E EPS. We maintain our BUY rating on VBL, with a revised 1-year Target Price of Rs1,300 (earlier Rs1,060).

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

Keywords

VarunBeverages INE200M01013 VBL Q1CY22 ResultUpdate RelianceSecurities