Shares of Varun Beverages soared over 4 percent intraday as investors could have bet positively on the company setting up a new unit in UP as well as a leading brokerage initiating coverage on the stock.
PepsiCo's bottler said that it has set up a manufacturing unit in Uttar Pradesh's Hardoi district. "The company has set up a new manufacturing unit for Pepsi range of products in district Hardoi, Uttar Pradesh," Varun Beverages said in a BSE filing.
Meanwhile, Kotak initiated coverage on the stock with a buy call and has set a target price of Rs 550. “We see Varun Beverages as a solid proxy play on the long-term growth story of the soft drinks category in India,” the brokerage house said in its report. It added that the company has end-to-end execution capabilities and presence across the entire beverage value chain and not just as a bottler.
The company has always been in surrounded with debate whether it should be seen as just a third party manufacturer as brand building and product development is usually handled by PepsiCo.
“Varun Beverages’ capture of the value chain is what one should focus on and the business’ return ratios reflect the picture. A valuation framework that captures the fundamentals well does not need to bother with nomenclature issues, in our view,” it said in its report.
Here are 3 aspects that the brokerage is talking about.
Growth drivers
Among growth drivers for the stock include leveraging PepsiCo’s brand strength and innovation capabilities. This would include its strong focus on non-cola carbonates, NCBs and packaged drinking water to tap into changing consumer preferences.
Secondly, acquisition of additional production and distribution rights to expand presence and drive sales volume.
Lastly, the expansion of distribution network and optimizing them to drive healthy long-term profitable growth.
Financials
The brokerage house expects the company to grow consolidated revenues over CY16-19 by 13 percent CAGR, aided by 10.1 percent volume CAGR and 2.6 percent realisation CAGR.
Along with this, it expects the company to deliver 33 percent EPS CAGR, aided by lower interest expenses, lower ETR and reduction in minority interest. It sees 130 bps contraction in EBITDA margin.
Key risks
Some of the key risks for the stock could be the material influence of PepsiCo on its operations. This could be particularly in case of price paid for concentrate, product pricing and growth plans.
Additionally, managerial and competitive challenges involved in integration of acquired territories and high exposure to seasonal variations could also be a few risks.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
