Q1CY23 Review Varun Beverages: Rapid growth continues

3 May 2023 , 03:20 PM

Varun Beverages (VBL) reported a strong performance with a sales growth of 37.7%, driven by volume growth of 24.7% YoY. Distribution expansion efforts in the newly acquired territories and improvement in product mix, has aided the performance. Volume growth of 28% in India makes VBL a clear outlier in an otherwise subdued growth environment. Analysts at IIFL Capital Services have upgraded their EPS estimates by 2%/5% for CY24/CY25 and have maintained their Buy recommendation on the stock with a target price of Rs. 1,630.

Strong volume growth

Revenues increased 37.7% YoY (7% above IIFL Capital Services’ estimates), driven by volume growth (25%YoY) and increase in net realization of 10.4%. Domestic volumes grew by 28%, driven by strong demand across regions with growth in rural higher than urban and continued distribution expansion. Net realization in India went up by 15%, driven by a better product mix and price hikes in select SKUs towards the end of the base quarter. International volumes grew 8% YoY in Q1. EBITDA rose 50.3% YoY and was 13% above IIFL Capital Services’ estimates.

Next legs of growth

VBL has identified Sports Drink (Gatorade), Value-added Dairy and Juice segments (Tropicana) as next legs of growth, to sustain growth momentum. The company plans to expand salience of Gatorade with smaller SKU of 200ml at a price point of Rs. 20 and of Value-added Dairy that also has attractive profitability like the Soft Drinks business from CY24. However, to fund growth, VBL is setting up two new greenfield plants in Maharashtra and UP to be operational next year; so as to ease capacity constraints in the Juice and Value added Dairy segments. Capex for CY23 to remain elevated at Rs. 15 billion.

EPS changes

Distribution expansion efforts will likely continue delivering strong volume growth for the company in the medium term. Analysts at IIFL Capital Services are forecasting an EPS CAGR of 22% over CY22-25, with RoIC reaching 25% by CY25. They expect VBL to become a net-cash company by CY25.