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Faster recovery improves earnings visibility

* VBL’s Q4CY20 operating performance was largely in line with our expectations but better than consensus estimates (39% beat), driven by better margin performance. EBITDA margins improved 350bps to ~13% (vs. our/Street expectations of 13.4%/9.6%).

* EBITDA margins continued to improve with 350bps YoY expansion in Q4, aided by benign RM costs, unprofitable plant closures and strong improvement in profitability of global operations (refer exhibit-2). VBL expects to retain partial cost savings in CY21E.

* VBL maintained its CY21E capex guidance (at <50% of depreciation) and indicated focus on debt reduction in CY21E. With strong cash generation in the business (refer exhibit-7), we expect VBL to reduce its debt by Rs7.5bn/Rs7.5bn/Rs8.5bn in CY21/22/23E.

* We maintain our CY21/22E estimates, forecasting 14%/28% EBITDA/EPS CAGR over CY19-22E. We raise the TP to Rs1,030, rolling over to Mar’23E EBITDA and raising multiple to its mean 1-Yr forward multiple (14.5x vs. 13.0x earlier). Multiple revision is on faster-than-expected recovery and improved earnings growth visibility. Retain Buy.

Faster volume growth revival:

Revenues grew ~9% YoY in Q4CY20, led by 6% volume growth and 3% improvement in realizations. Both Domestic (~80% of volumes) and global volumes (rest 20%) saw faster growth revival with volume growth of ~1%/22% YoY, despite challenges in on-the-go channel (~60%/44% of overall sales in CY19/CY20). VBL indicated continuation of growth trends in Jan’21 post strong volume growth in Dec’20 and marginal growth/decline in Oct’20/Nov’20. Among categories, CSD/Water (~95% of pre-Covid volume) delivered 6%/12% volume growth, while Juice volumes declined 20% YoY. VBL expects pickup in juices with improving mobility and distribution expansion. Visi-Cooler additions, a measure of penetration improvement, were healthy at 25,000+ in Q4CY20. VBL indicated market share gains in CY20 and highlighted focus on further improving market share.

Margins can throw up a potential surprise:

VBL’s EBITDA margin performance in CY20 was driven by healthy margin improvement in global operations. Standalone margins (largely India) declined ~400bps YoY (vs. ~170bps overall decline; refer exhibit-5), affected by negative operating leverage due to ~300bps increase in employee costs and 200bps increase in other expenses. This decline was offset in part by ~100bps improvement in gross margins. We believe that return of normalcy in India operations and sustained profitability in global operations can throw up potential margin upsides.

Maintain Buy with a revised TP of Rs1,030:

We maintain our CY21E/22E estimates, forecasting 14%/28% EBITDA/EPS CAGR over CY19-22E (~5% ahead-of-consensus). We raise the TP to Rs1,030 (vs. Rs875 earlier), rolling over to Mar’23E EBITDA and raising multiple to 14.5x (vs. 13.0x earlier), on account of faster recovery and improved earnings growth visibility.

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