Varun Beverages: Capacity & geographic expansion to fuel growth

1 Apr 2024 , 11:48 AM

VBL reported yet another strong performance with volume/value growth of ~14%/22% YoY, driven by domestic volume/value growth of ~13%/19%. Softening of PET chip prices aided in the GM/Ebitda margin expansion by ~110bps/130bps. VBL is aggressively expanding its manufacturing capacities as well as its geographic territories. As a result of elevated capex, FCFF for CY23 was an outflow of ~Rs12bn. With the acquisition of BevCo, VBL is well placed to tap into the large opportunity in the African continent beverage industry. This, coupled with continued ramp-up in juices (Tropicana), Sports drink (Gatorade), value added dairy and Sting is expected to be the key growth driver. Analysts of IIFL Capital Services estimate Sales/Ebitda/EPS to grow at ~19%/19%/23% over CY23-26. Maintain BUY, TP Rs1,500.

Robust growth continues:

VBL reported a consolidated net sales/volume growth of ~22%/14%. India sales grew by ~19%, driven by a volume growth of ~13% and ~7% growth in net realisation per case, driven by continued improvement of mix of smaller SKUs (250ml). Sting contributed to 15% of domestic volumes in CY23. Gross margin expanded by 110bps YoY, on account of moderation in RM prices. Ebitda grew by ~30% and the margin expanded by ~130bps on account of GM expansion and operating leverage, due to strong volume growth.

Capacity and geographic expansion to fuel growth:

VBL is aggressively expanding capacities as well as geographic presence; which analysts of IIFL Capital Services believe will be the key growth driver. In CY23, VBL has incurred capex of ~Rs34bn towards greenfield and brownfield expansions. The combined capex for CY23 and CY24 is expected to boost the peak month capacity in India to ~45% over CY22 capacity. With the acquisition of BevCo, the company is well placed to tap into the large opportunity in the African continent beverage industry.

Strong growth prospects:

VBL has been a consistent outlier, outperforming its large-cap FMCG peers. The continued ramp-up in juices (Tropicana), Sports drink (Gatorade), value added dairy and Sting; coupled with the acquisition of BevCo is expected to drive robust growth for VBL. Analysts of IIFL Capital Services expect sales/Ebitda/EPS to grow at ~20%/19%/23% over CY23-26. The stock is currently trading at ~58x/48x CY25/26. Though expensive, analysts of IIFL Capital Services believe the valuation is justified given the track record and strong growth prospects. They maintain BUY; TP Rs1,500.