Hold Varun Beverages; target of Rs 965: ICICI Direct
ICICI Direct recommended hold rating on Varun Beverages with a target price of Rs 965 in its research report dated February 17, 2021.
February 18, 2021 / 02:43 PM IST
ICICI Direct's research report on Varun Beverages
Varun Beverages reported healthy results with 9.1% revenue growth & 48.8% growth in operating profit. The strong revenue growth was aided by 5.7% organic volume growth & 3.2% realisation growth. The company sold 87 million cases in Q4CY20, which constitutes 63% carbonated soft drinks (CSD), 5% juices & 32% water. With substantial improvement in out of home activity & opening up of HORECA segment, the company saw strong recovery in volumes in H2CY20. Operating profit increased 48.8% to Rs 172.2 crore led by 472 bps improvement in gross margins & 91 bps saving in employee spends. The lower PET chips prices & stable sugar prices aided gross margins. Other overhead increased 218 bps as percentage of sales. Operating margins improved 345 bps to 12.9%. The company reported net loss of Rs 7.2 crore during the quarter vs. loss of Rs 53.9 crore in the corresponding quarter. We believe consolidation of south & west geographies has helped the company to reduce losses in non-peak season. The reduction in losses was also aided by lower interest cost & tax reversals.
Given beverages is largely a discretionary category and a large part of demand is contributed by ‘On-the-go’ activity, the category was impacted heavily in last 10 months. We believe VBL would be able to substantially reduce its debt in next two years. We expect 45.2% CAGR earnings growth during CY20-22E aided by low base, margin improvement and reduction in interest cost. The stock is fairly valued at current valuation multiples. We value the stock at 18x CY22 EV/EBITDA with a revised target price of Rs 965/share (earlier Rs 730). We maintain our HOLD rating.
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