Varun Beverages: Unseasonal rains vs Africa

26 Jun 2023 , 10:28 AM

Recommendation: Buy; Target price: Rs 860

 

Analysts of IIFL Capital Services have been positive on VBL since their initiation in October 2017. However, in the past 1 year, the stock has doubled and investors are hesitant to enter now. The likely flat volumes due to unseasonal rains and consequent weakness in stock price may provide a good entry point. CY24 volumes are likely to remain unchanged despite a cut to CY23, as witnessed post Covid. Moreover, Africa presents a huge opportunity for VBL. Although too early to build in, analysts of IIFL Capital Services estimate a potential 10% accretion to stock price on account of entry into new geographies in the African subcontinent. Maintain BUY, price target Rs860.

Congo and South Africa big markets: 

VBL’s likely entry in Congo (200mn cases) and SA (1bn cases) open up a market over half the size of India (~2.2bn cases). In both geographies, Pepsi’s market share (MS) is very low and it can ramp up MS to 25% over 10 years, with Ebitda margin in line with company average. Per our calculations, the present value of the opportunity is ~10% of CMP. Of course, it is too early to build this in, but investors should be aware of this possible upside over time.

Unseasonal rains result in CY23 cut; CY24/25 unchanged: 

Due to unseasonal rains, India volume YoY is likely to be flat for Q2CY23. This in turn would result in sales / EPS cut of 3.3%/4.7% for CY23, but keep CY24/25 unchanged. As noticed during Covid, if growth in one year is low on account of a factor impacting only that year, growth for the next year increases.

Stock could give a buying opportunity: 

News-flow around a poor quarter could result in weakness in the stock, which would give a buying opportunity. The stock is currently trading at 44x CY24 and does not price in possible upside from new geographies — which could add ~200bps Cagr to growth over 10 years. In its International business, VBL has clocked 22% volume Cagr in CY17-22.