Published on 4/07/2019 9:56:08 AM | Source: ICICI Securities Ltd

Buy Varun Beverages Ltd For The Target Rs.1,106 - ICICI Securities


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Vol. I. Competitive landscape in Beverages

Beverage is an evolving industry in India and competitive landscape is also changing rapidly. We start a series to understand the competitive environment for Varun. In this note, we analyse the portfolio and growth rates of Coca-Cola India which has ~70% market share in carbonated soft drinks. Key observations: 1) Coca-Cola has reported mid-high single digit volume growth in India over past 4 years. 2) Its portfolio includes multiple own/acquired Indian brands and 3) it is steadily launching products in India. We believe a mixture of Indian and global product portfolio gives a competitive edge to Coca-Cola over others in India. Varun (Pepsi) has also steadily introduced multiple products in India in juices as well as carbonates. We expect it to report PAT CAGR of 34% over CY18-21 with rising RoCE and maintain DCF-based target price of Rs1,106 (28.6x CY21E).

* Growth rates of Coca-Cola in India: In SEC filings, Coca-Cola USA has indicated volume growth in India and South West Asia group was 10% in CY18. Similar number for CY16 and CY17 were 3% and 1%, respectively. India reported volume growth of 4% in CY15. In Q1CY19, unit volume growth in India and Asia pacific was 7%, YoY. Pepsi lost volumes from 200mn cases in CY16 to 135mn cases in CY18 in South and West India and it allowed Coca-Cola to gain market share.

* Coca-Cola’s ‘Indianised portfolio’: By way of acquisitions and organic launches, Coca-Cola has created a product portfolio suitable to Indian consumers. Its major Indianised brands are 1) Thums Up – Cola beverage, 2) Limca – Lemon-based carbonate, 3) Maaza and Maaza Gold – Mango-based fruit beverage, 4) RimZim – Jeera-based carbonate and 5) Aquarius Glucocharge – glucose drink. The company has also introduced various Indian variants such as Minute Maid Fruit Punch - Indian Twister and Minute Maid 100% Indian Santra Juice.

* Steady launch of new products: Coca-Cola has continued to steadily introduce new products in India over the past 5-6 years. It has introduced multiple global brands which indicate rising confidence of Coca-Cola in Indian operations. Among the launches, key products were 1) Fuze Tea in 2015, 2) RimZim jeera carbonate in 2018 and 3) ZICO Coconut Water in 2017, 4) Rani Float in 2018 and 5) Barbican malt beverage in 2018.

* Focus on non-cola beverages: We note Coca Cola is focussing more on launches of healthier drinks (relatively) such as juices, coconut water, packaged water, milk based beverages instead of introducing more variants of carbonates..

* Maintain BUY: We expect Varun to report revenue and PAT CAGRs of 22% and 34%, respectively, over CY18-CY21E with improving RoCE. Varun will benefit from relationship with PepsiCo, pan-India distribution and backward integration. Strong earnings growth leads us to maintain BUY rating and DCF-based target price of Rs1,106 (implied P/E of 28.6x CY21E). 


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