Add Varun Beverages Ltd : Analysing the impact of second Covid wave – Better prepared in CY21 - ICICI Securities
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Analysing the impact of second Covid wave – Better prepared in CY21
Add Varun Beverages Ltd For Target Rs.1,100
Varun Beverages (Varun) is better prepared to tackle the impact of second wave of Covid in CY21 than it was in CY20. Company has aggressively invested in driving in-home consumption over the past year and has also introduced 1.25Ltr SKUs. It is also relatively better prepared now in terms of logistics and distribution. In the event of another strict lockdown, volume offtake will be materially impacted. However, if lockdowns are only on weekends, impact on volumes will be much less, and it will be negligible in case of night lockdown. Varun is also likely to gain market share from smaller / unorganised players as consumers prefer packaged beverages over juices from street stalls due to safety perceptions. We believe, there will be some impact on HoReCa consumption which accounts for 6-7% of Varun’s overall volumes. Maintain ADD with a target price of Rs1,100, implying 35x CY22E.
* Major impact in Maharashtra state and HoReCa segment: Maharashtra is one of the most affected states by Covid and accounts for 6-7% of Varun’s revenues. HoReCa (hotels, multiplex, theatres, etc.) segment too accounts for 6-7% of revenues. If Covid continues to surge, it may have some impact on the company’s revenues in Maharashtra and HoReCa segment. Impact on offtake from rest of India though will be negligible.
* Focus on in-home consumption continues: Company has been investing aggressively in driving in-home consumption over the past year. It has also introduced 1.25Ltr SKUs for consumption at home. We expect in-home consumption to continue to steadily grow even if out-of-home intake is impacted.
* Impact on offtake in case of lockdown (if any): We have seen three types of lockdown in India: 1) if it is ‘strict’, Varun’s volumes will be materially impacted; 2) if lockdown is only on weekends, some volumes will be lost; 3) if it is night lockdown only, volume decline will be insignificant. We believe Varun is also better prepared in terms of logistics and distribution management in CY21 than it was in CY20.
* Market share gains from smaller players: Many consumers prefer packaged beverages over fruit drinks and juices sold by street shops. This allows Varun to gain market share from smaller / unorganised players. Market share can be gained in packaged water segment too as consumers don’t prefer tap water out-of- home.
* Maintain ADD: We model Varun to report revenue and PAT CAGRs of 25.5% and 55.9% respectively, over CY20-CY22E. Company continues to benefit from its relationship with PepsiCo, pan-India distribution, backward integration, and increased in-home consumption. Maintain ADD with a DCF-based target price of Rs1,100 (35x CY22E). Key risks: Sharp increase in competitive pressures and hike in raw material prices.
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