Buy Varun Beverages Ltd For Target Rs.950 - ICICI Direct
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Covid-19 again adversely sways summer season…
About the stock Varun Beverages (VBL) is one of the largest franchisees of PepsiCo in the world. The company produces & distributes carbonated drinks, juices & packaged drinking water in six countries including. Some of the PepsiCo brands produced by VBL include Pepsi, Diet Pepsi, Seven-Up, Mirinda, Mountain Dew, Nimbooz, String, Slice, Tropicana, Aquafina, among others.
* The company has operations in India (except Andhra Pradesh, J&K & Ladakh), Sri Lanka, Nepal, Morocco, Zambia & Zimbabwe.
Q1CY21 Results: VBL reported a partial recovery in Q1FY22 results.
* Sales were up 49.4% YoY on a low base quarter
* EBITDA was at | 570.8 crore, up 51.1% YoY, with margins at 23.3%
* Consequent PAT was at | 318.8 crore (up 123% YoY)
What should investors do?
Varun Beverage share price has given 4x return (from | 195 in November 2016 to | 789 in August 2021).
* We roll over CY23 numbers with the expectation of full sales recovery in next two years
* We maintain our BUY rating on the stock.
Target Price and Valuation: We value the stock at | 950, valuing the business 22x CY23 EV / EBITDA.
Key triggers for future price performance:
* With the expected recovery in Covid-19 cases & vaccination drive, we expect VBL to clock optimum volumes in the 2022 peak summer season with operating margins perking up due to operating leverage.
* The company has launched several new brands in last two years i.e. String, ‘Mountain Dew ICE’, milk based beverages. New products would drive revenues, going forward.
* Given no major capex in the medium term, VBL would be able to completely de-leverage its balance sheet in the next three to four years with strong free cash flow generation.
Alternate Stock Idea: We also like Zydus Wellness in our FMCG coverage
* It is growing at a steady pace in nascent categories with a strong presence in health, nutrition space and margin expansion possibilities
* Trading at a significant discount to FMCG peers. BUY with TP of | 2,800
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