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Strong recovery in Out of Home with in-home consumption sustaining, margin headwinds remain; maintain ADD

Our view

VBL posted a solid volume growth led by a demand uptick across geographies with a pickup in mobility. Growth was even better in juices and other new launches with Out of Home channel staging a strong recovery and in-home consumption trends sustaining. High operating leverage and cost efficiencies helped maintain margins despite PET cost inflation. The company looks set to have a strong CY22 after two consecutive pandemic-affected peak seasons and is also planning for the next phase of expansion with a new greenfield unit in Bihar. As debt keeps coming down and cash position improving, the company is looking at acquiring more territories from Pepsico mainly in Africa. We believe the company is a good compounding story for the long-term with a growth potential in the mid-teens with stable margins and return ratios. We maintain our ADD rating for now and would expect some re-rating once the company finally starts executing on its aggressive growth plans on the markets acquired in South and West probably from 2QCY22.

Result Highlights

* Result summary – Revenue/EBITDA/PAT growth of 33%/30%/60% led by robust volume growth of 28.4%. Organic volume growth of 11% on 2-yr CAGR basis. Volume sales stood at 153.3mn cases vs 119.5mn cases in Q3CY20. Realization per case increased 3.6% to Rs156.4/case primarily driven by higher realization in international markets.

* Revenue share – Revenue contribution for CSD/Juice/PDW stood at 70%/5%/25% vs 74%/6%/20% representing 21%/54% YoY growth in CSD/juice.

* Margins – Consolidated GM fell 380bps to 52.8% on the back of increase in PET prices (18%) and sugar prices (2%) in India. EBITDA margin declined only 50bps to 20.6% led by lower SGA expenses.

* Earnings – PAT grew 60% YoY to Rs258cr driven by lower interest expense given debt repayment and 100bps decline in cost of borrowing and higher other income.

* Management commentary – Confident of reporting robust performance in coming quarters driven by strengthening demand and consumption led by vaccination drive, improving economic outlook and uptick in OOH consumption.

Valuation :

We build in Revenue/EBITDA/PAT CAGR of 21%/27%/46% during CY20-CY23E led by a double-digit volume CAGR and gradual uptick in margins led by structural cost efficiencies. We maintain ADD rating on Varun Beverages with TP of Rs 915 valuing the company at 30x CY23E earnings implying 16x EV/EBITDA for 21% average ROE.

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