Q3FY24 Review: Varun Beverages: Yet another strong quarter

6 Feb 2024 , 12:46 PM

Varun Beverages (VBL) reported yet another strong quarter with a top-line growth of ~21% driven by 18% volume growth and improvement in net realization by ~3%. VBL has had a history of value accretive acquisitions and with acquisition of BevCo in South Africa, it is well placed to tap the large opportunity in African Beverage industry where currently the market share is low (1.5% for PepsiCo and ~12% for BevCo). Although expensive, trading at 55x CY25, the valuation is justified given the track record of the company. Analysts of IIFL Capital Services factor in acquisition of South Africa and Congo, and while the near term EPS is negligible, these are highly accretive acquisitions due to sales and margin ramp up potential. Maintain BUY, TP ₹1425 (9% upside). 

Beat on estimates:

The sales for Q4CY24 grew by ~21% driven by 18% volume growth (18.7% growth in India volumes and 16% in International volumes). The gross margin expanded by ~30bps and stood at 56.6%. The Ebitda margin expanded by ~180bps (IIFLe ~120bps) and stood at 15.7% (IIFLe ~15%). The PAT grew by ~77% (IIFLe 54%) driven by beat on Ebitda and lower than expected effective tax rate (23.5% vs IIFLe of 26%). 

Acquisition to be value accretive from CY25: 

VBL has a history of value accretive acquisitions. The acquisition of BevCo, South Africa and Congo provides VBL with an opportunity to tap the large beverage industry in the African region. Currently, the margins for Bevco are estimated to be lower than that of VBL, however, with increase in scale and operating leverage, the margins are expected to go to high teens. The acquisition is expected to be EPS accretive from CY25 onwards. Analysts of IIFL Capital Services build in a sale of Rs10.2bn (6 months in CY24) and Ebitda margin of ~12% for CY24. The sales are estimated to grow by 15% in CY25/26 and the Ebitda margin is likely to expand to ~14%/17%. 

Valuation is justified: 

Analysts of IIFL Capital Services estimate the sales for CY24/25/26 to grow by ~23%/19%/14% driven by distribution expansion in the current markets and completion of acquisition in South Africa and Congo. As a result of this, analysts of IIFL Capital Services upgrade their sales estimate for CY24/25 by ~4%/10%. Though expensive, trading at 55x CY25, the valuation is justified given the track record of growth. Maintain BUY, TP ₹1425.