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Likely limited impact of lockdown (if any)

Based on our channel checks, we believe Varun Beverages is likely to maintain strong double-digit volume growth, in line with earlier quarters. It has not yet raised prices of its products in spite of inflation in key raw materials such as sugar and PET (packaging material). It plans to focus on Eastern states and is on track to set up a new plant in Bihar. We also believe lockdown (if any) would likely have a negligible impact on the company’s sales as the lockdown is likely to be in Q1CY22 (non-season). We model the company to maintain EBITDA margins of ~19.5% over CY22-23E via judicious price hikes and cost-saving initiatives. We expect Varun to report a PAT CAGR of 44.8% over CY20-23 with improving RoE. Maintain ADD with a DCF based TP of Rs930 (35x CY23E EPS; earlier TP: Rs920).

* Volume growth to remain strong: Varun is likely to maintain strong double-digit volume growth even in Q4CY21 due to (1) distribution expansion, (2) market share gains and (3) increase in in-home consumption. As some of the smaller / unorganised brands have been impacted due to covid-led lockdowns, Varun has gained share from these smaller brands.

* Focus on Eastern markets: Varun plans to set up a new plant in Bihar and the work is largely on track. It plans to cater to Bihar and neighboring states from the Bihar unit. Considering low per capita consumption in Bihar, there is healthy growth potential for the company in the Eastern states, in our view.

* Lockdown (if any) will have a limited impact in non-season: The company suffered significantly as lockdown -1 (Q2CY20) and lockdown -2 (Q2CY21) happened in its key season of summer. However, lockdown -3 (if any) is likely to be in Q1CY22 i.e. before the summer season commences. Hence, we believe there will not be any material impact on the company’s volumes due to the lockdown.

* No material impact of higher input prices: While input prices of sugar and PET (packaging material) have increased YoY, the company has not yet raised prices of its products. It has taken some cost-saving initiatives and made changes to its packaging material which may help it maintain margins going ahead.

* PLI benefits on juices are negligible but incrementally positive: Varun is entitled to PLI benefit on incremental sales of juices. However, as juices contribute ~7% of annual sales, we believe the benefit at the company level will not be material.

* Maintain ADD: We model Varun to report revenue and PAT CAGRs of 20.2% and 44.8%, respectively, over CY20-CY23E. It continues to benefit from its relationship with PepsiCo, pan-India distribution, backward integration, and increase in in-home consumption. Maintain ADD with a DCF-based target price of Rs930 (35x CY23E EPS; prior: Rs920).

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