Varun Beverages Ltd. share price target

Varun Beverages (VBL) reported 9% revenue growth, driven by revival in Carbonated Soft Drink (CSD) volumes and an uptick in international volumes leading to 6% YoY volume growth. Blended realizations improved 2.8% YoY to INR153/unit case, led by a favorable product mix and improved realizations in the international market. 4QCY20 revenue/EBITDA was better than our estimates. We raise our earnings estimate for CY21 by 21% primarily owing to an increase in EBITDA (on the back of higher margins) and a lower tax rate and maintain...

Near monopoly in PepsiCos India business ............................................................ 7 Improving mix in line with long-term strategy ...................................................... 12 More room for growth in soft-drink segment ....................................................... 15 Newly acquired territories to drive growth .......................................................... 19 Beverage Industry ................................................................................................ 21 SWOT analysis ..................................................................................................... 25 Expect EBITDA CAGR of 15% to ~INR22b over CY19-22E ....................................... 25 Valuation and view .............................................................................................. 29...

Varun Beverages Ltd (VBL) is the 2nd largest franchisee for PepsiCo in the world (outside USA). It manufactures Carbonated Soft Drinks - Pepsi, Mountain Dew, Seven Up, Mirinda; Non Carbonated Beverages - Tropicana Slice, Tropicana Frutz; and Bottled water Aquafina.

Realization and Cost Savings Helped Drive Growth: Volumes continue to be robust in rural and semi urban India, which helped sustain overall volume dip to only 4percent despite significantly lower on the go consumption.

With a sharp fall in PET resin prices & stable sugar price, we expect gross margin expansion of 72 bps in CY21. Moreover, cost rationalisation measure would lead to operating margin expansion of 124 bps in CY21. VBL expects these cost cutting measure to remain permanent. The management has guided 21% operating margin for CY21. Further, we believe juices & CSD contribution would increase, going forward, as the company would be able to generate more margin considering its new Juice plant has already been commissioned. VBL would be re-launching milk based beverages in CY21...

With encouraging revival on MoM basis and healthy growth in International business with season on the anvil, and sustenance of cost optimization benefits we raise our EPS estimates by 4-14% over CY20-22E. At CMP, stock trades at 9.3x EV/EBITDA which is attractive in our view

Although Varun Beverages Limited (VBL) performance in Q2CY20 was below our estimates on topline/bottomline the commentary on demand recovery and market share gains was positive. Sales volumes in June '20 was +75% YoY with July much better than June.

Valuation and Risks: Since its listing in Nov 2016, VBL has historically traded consistently within its avg1 year forward PE of 47x. Given the pandemic and economic downturn, we factor in the risk regarding longevity of the economic troubles and value the stock at a discount of ~ 10% (40x) from its 1 year forward PE since listing on CY21E EPS of Rs. 20.8 and recommend BUY'.

Varun Beverage management indicated that the business is seeing good recovery from the lows noticed during the last week of March when the lockdown hit the nation. We note that VBLs utilization levels have more than doubled MoM in May to 65% levels from 30% recorded in April 2020.

Although Varun Beverages Limited (VBL) performance in Q1CY20 was better than our estimates on topline/bottomline we note that Q2CY20 (~40% sales) could be severely impacted given the rapidly evolving situation on ground and sharp impact of 10 days lockdown on organic volumes which declined by 13.7%