Varun Beverages: Strong volume growth continues

8 Mar 2023 , 10:31 AM

Recommendation: Buy

Target Price: Rs 1,520

 

VBL posted strong volume/value growth of 41%/49% YoY, driven by resurgence in out-of-home demand post COVID, distribution expansion and rapid scale-up of energy drink ‘Sting’. On a 3-year CAGR basis, organic volume/value growth stood at 16.8%/21.8% over CY19-22. ROE/ROIC expanded strongly, on the back of robust expansion in EBITDA margin. However, FCFF was negative at Rs300 million, as the company continued to spend on capacity expansion (Rs18 billion capex). Continued investments in distribution/capacity expansion will keep growth elevated in the medium term. Analysts at IIFL Capital Services forecast sales/EBITDA CAGR of 15% for CY22-25. 

Broad-based growth

VBL’s CY22 performance was strong with volume/value growth of 41%/49% YoY. India volumes growth was higher at 44%, boosted by resurgence in the out-of-home channel post COVID, complemented by VBL’s initiatives to expand distribution in underpenetrated territories of West and South. Moreover, Sting became a key growth lever contributing ~10% of domestic volumes and higher realization at the company level. While gross margins contracted by 180bps YoY due to higher preform prices, EBITDA margin expanded by 240bps owing to higher realization (6% YoY) and operating leverage due to strong volume growth.

Elevated capex to fuel next leg of growth

CY22 capex continued to be high at Rs18 billion (13.6% of sales) versus Rs.9 billion in CY21 targeted towards capacity expansion in India and International. FCFF as a result was negative at Rs300 million. However, robust margin performance led to net debt-to- EBITDA falling to 1.3x from 1.9x in CY21. ROE/ROIC expanded strongly to 33%/20% from 18%/11% in CY21, driven by higher asset turns and EBIT margin.

Growth trajectory will remain robust

VBL has been a clear outlier in an otherwise subdued growth environment. Analysts at IIFL Capital Services expect this to continue in the medium term, driven by multiple efforts taken by the company to penetrate deeper in existing and new territories and new product launches (Sting) leveraging changes in consumer tastes post COVID.