Buy Varun Beverages; target of Rs 1900: Motilal Oswal

Motilal Oswal's research report on Varun Beverages

Varun Beverages (VBL) has inched closer to its goal of becoming a full-scale F&B player with the recent agreement with PepsiCo to manufacture, distribute, and sell snack food items in Zimbabwe and Zambia. We believe this agreement will serve as a building block for VBL’s snack food business.  This is an exclusive snacks franchising agreement with PepsiCo to manufacture, distribute, and sell snack foods under the brand name “Simba Munchiez” in Zimbabwe and Zambia. VBL will set up a 5,000mtpa manufacturing capacity in each location for aggregate capex of ~INR1.2b.  The total addressable market (TAM) for VBL’s snack food division has expanded by 67% with the addition of two new geographies (vs. only Morocco earlier). The snack food products market in these geographies is valued at ~USD833m (aggregate) in CY24. This region accounts for ~6.5% of Africa’s snack market size of USD12.9b, which is expected to clock an ~8.1% CAGR over CY24-29E. PepsiCo, which holds the highest market share globally in this segment (as of CY23), will be a perfect partner for VBL to tap into this massive opportunity. Going ahead, we believe VBL and PepsiCo may expand their partnership in this segment, especially within the African continent, where PepsiCo does not have any manufacturing partner and primarily relies on imports.

Outlook

We expect a CAGR of 21%/22%/29% in revenue/EBITDA/PAT over CY23-26. We value the stock at 60x Sep’26E EPS to arrive at a TP of INR1,900. We reiterate our BUY rating on the stock.