CLSA upgrades Varun Beverages to 'high conviction outperform', believes shares can rally 70%

Varun Beverage's share price has tanked 28 percent in last three months.

Hong Kong-based brokerage CLSA upgraded its rating on soda bottler Varun Beverages Ltd. to a 'high conviction' outperform, from its earlier 'outperform' tag.

However, the brokerage mildly trimmed its target price on the soda player to Rs 770 per share, from Rs 802 earlier. According to brokerage, the risk-reward is extremely compelling, despite rising competition in the space. This indicates a whopping upside of almost 70 percent.

The pricing scenarios currently suggest that there is a five percent EBITDA downside for CY25. Further, capital expenditure as a percentage of sales peaked in CY23, leading CLSA to believe that capex intensity might ease going forward.

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The total addressable market for Varun Beverages and the soft drink market, as a whole, is growing, with a large upside for soda consumption.

However, the brokerage trimmed its CY25-27 earnings estimates by 4-5 percent to reflect heightened competition.

The brokerage noted that Varun Beverage's stock price has corrected 28 percent in last three months with 12 months forward PE multiple correcting from 62.8x to 43.8x.

The brokerage noted the key underperformance in the shares comes as a result of:

1. Added concerns around increasing competition from Campa Cola with its Rs 10 offering
2. Competition from Coca Cola as the bottling arm Dodi undergoes a restructuring
3. Higher capex guidance and investors concerns around slowing urban consumption in India

However, CLSA noted that investors concerns are overdone, and that the stock is trading below its average multiple. Further, the outlook on Varun Beverage's growth and profitability remains robust.

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