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Last Updated : Jun 14, 2019 12:02 PM IST | Source:

Despite its share price doubling in less than 3 years, Varun Beverages is only warming up

Analysts are counting on the stock to unleash its true growth potential in India after the beverage major acquired PepsiCo franchise rights in West and South India.

Suyash Maheshwari @Suyashm9
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Varun Beverages has surged over 119 percent since getting listed in November 2016 and despite a steady rise in its share price over the last three years, the scrip is on the verge of hitting the fast lane sooner rather than later.

The company reported a 118.1 percent increase in net profit at Rs 40.63 crore for the quarter ended March 2019. Net sales rose to Rs 1,359.15 crore, a 24.1 percent increase in the same period.

Analysts are counting on the stock to unleash its true growth potential in India after the beverage major acquired the franchise rights to PepsiCo in West and South India.


Apart from strong brand affiliations, Varun Beverages has multiple moats, which includes an established distribution network of 2 million retail outlets, 36 manufacturing units pan-India, which reduces freight costs, and backward integration. The company also benefits from economy of scale after consolidating in West and South India.

Moreover, the commencement of operations in its Pathankot facility this year shall improve its margins as well as its asset turns.

ICICI Securities believes that Varun Beverages will report a Compound annual growth rate (CAGR) of 34 percent over CY18-CY21E, while profit after tax shall grow 22 percent in the same period.

Emkay, on the other hand, expects a CAGR of 30 percent over CY18-CY21E and its Return on capital employed (RoCE) to expand by 70 bps/160 bps in CY19-CY20E to 14.3/15.8 percent.

"We expect VBL’s CY19E total sales volumes to rise 42 percent YoY, of which 29 percent is expected to come from acquisition, 9 percent from organic growth and remaining 4 percent from its international business," said Emkay.

The company has continued to generate a RoCE upward cost of capital of 12.5 percent and analysts predict that it will continue to generate a healthy return to fund its growth potential in the medium to long term.

Analysts said that Varun's relationship with PepsiCo, a pan-India distribution and backward integration shall continue to drive its RoCE.

Varun Beverages' business model offers a healthy chance to compound value at a steady pace over the next decade.

However, they said that the company's fixed-asset turnover ratio, which is at 1x, is hurting its return ratios.

Nonetheless, they opined that it can improve with higher capacity utilisation.

"Due to the ‘high volume and low value’ nature of the product, the company needs to set up plants across the country. It impacts its capacity utilisation and also denies the benefits of economies of scale," ICICI Securities said.

According to analysts, while the general perception is that bottling companies cannot have healthy return ratios as most of the value is extracted by the brand/franchise owner, they continue to generate ratios in excess of the cost of capital across the industry. The same is true for Varun Beverages.

The established subsidiaries of Varun Beverages in Zambia and Nepal have also continued to generate a RoCE upward of 20 percent.

While analysts think that the company's investments in West and South India franchises will hurt its return in the near term, drivers such as value-accretive acquisitions, national spread to reduce distribution cost, its backward integration, the Pathankot facility, an arrangement for concentrates and scale benefits will expand the ratios in the coming years.

Healthy growth potential of the Indian beverage market

Analysts said that the Indian beverage industry has the potential to grow it mid-high teens in the coming years on the back of low per capita consumption, rising penetration in rural markets, socio-economic factors such as the dying art of preparing homemade beverages and other factors such as higher consumption of liquor.

Growth strategy of the company

According to analysts, Varun Beverages is focused on a two-pronged growth strategy which includes geographical area expansion and product portfolio expansion. The company has expanded its reach across India through acquisitions, and at the same time, has steadily introduced new products such as juices and energy drinks.

Strategy in global markets

Varun Beverages currently operates in five developing economies including Nepal, Sri Lanka, Zambia, Morocco and Zimbabwe. The company has reported CAGR of 20.1 percent in its international markets over CY12-CY18 and has doubled its market shares in most of its international geographies over the past five years. Analysts said that the primary reason for this is the company's aggressive investment in trade and distribution.

Progressive outlook

The company has responded well to the market's need for healthier alternatives by introducing two products in low/zero calorie segments including Diet Pepsi and Pepsi Black. It has also introduced smaller SKUs (150ml) of the full-sugar carbonate version of Pepsi.

Analyst's take

ICICI Securities has initiated coverage on the stock with a Buy rating and target price of Rs 1,106.

Emkay reiterated its Buy rating on Varun Beverages with a target price of Rs 1,124.

Axis Capital has a Buy rating on the stock with a revised target price of Rs 1,050 (Rs 1,000 earlier).
First Published on Jun 14, 2019 12:02 pm
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