Buy Varun Beverages; target of Rs 1620: Motilal Oswal

Motilal Oswal's research report on Varun Beverages

The Indian beverage industry is expected to witness significant growth opportunities going ahead on the back of favorable climatic conditions (hot, dry, or moderate), growth in per capita income, accelerated urbanization, an expanding demographic profile and a rising middle-class population. Rural electrification and increasing fridge penetration should further fuel growth in rural and semi-urban areas, which account for ~60% of revenue. (Refer our latest report) In order to tap into the vast opportunity, VBL has expanded its distribution network to over 3m retail outlets in CY22 (v/s over 2m in CY21) and ~2,400 primary distributors (v/s ~2,000 in CY21) along with over 9.25 lakhs visicoolers (v/s 8.4 lakhs in CY21), over 2,500 distribution vehicles and over 110 depots. This robust network is backed by VBL’s 37 state-of-the-art manufacturing facilities spread across India and international locations (31 in India and six in international territories). VBL’s robust supply chain, along with backward integration facilities (including newly commissioned J&K facility) for production of preforms, crowns, plastic closures, corrugated boxes, corrugated pads, plastic crates and shrink-wrap films, provides an edge to the company in an expanding market. The company’s newly commissioned J&K facility will provide an opportunity to enter into this territory.

Outlook

We expect a revenue/ EBITDA/PAT CAGR of 16%/18%/27% over CY22-24. We value the stock at 44x CY24E EPS to arrive at a TP of INR1,620. Maintain BUY.