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Buy Varun Beverages Ltd For Target Rs.1,120

Enough juice and fizz left; raising TP to Rs1,120, maintain Buy

* We raise VBL’s Sep’22 target price to Rs1,120 (from Rs915 earlier) based on a higher target P/E of 35x (28x previously). Multiple-upgrade is driven by improved long-term growth outlook—now about mid-teen revenue/EPS CAGR vs. low-teen growth previously.

* Our TP is backed by a two-stage growth model. Annual per capita consumption (PCC) of soft-drinks in India was 18-19L in CY19 vs. 79L/152L for China/Brazil. India’s PCC may reach 100L by CY35E (11% CAGR), in line with consumption in economies having similar GDP/capita. This yields a volume CAGR potential of 11-12% for the Soft-drinks category.

* We model 14% revenue CAGR for VBL over next 15 years, based on 12.5% volume CAGR (market share gain in South/West) and a modest 1.5% CAGR in realization. S&W regions account for 55% share of category revenues, but merely ~30% share of VBL’s Visi-coolers.

* Our CY21E-23E EPS is ahead of consensus by 5-10%, as we build-in stronger post-Covid recovery and strong traction in Energy drink ‘Sting’. We see scope for consensus upgrades.

Good scope for increasing penetration in acquired regions: The acquired South/West regions likely contributed ~55% of industry revenues in CY15/20E vs. 45% by existing NorthEast regions. But VBL currently has a lower VC mix of ~30% in these regions (see Exhibit 4- 5). Channel checks also suggest that VBL’s focus remains on improving penetration through aggressive VC placements and improving service to retail outlets with go-to-market initiatives. Strong traction in Sting and the introduction of value packs (1.25L at Rs50 and 600ml at Rs30) also helped VBL deliver a strong double-digit 2-year volume CAGR in 5 out of 7 months till Jul’21. We expect VBL to deliver a ~14% CAGR in the long term vs. ~11% consumption-led growth, aided equally by market share gains and price hikes (see Exhibit 1-2 & 6).

Expect upgrade to consensus estimates: Our CY21-23 EPS estimates are higher than the consensus by 5-10%, factoring in a healthy recovery in CY21 so far and strong traction in energy drink Sting. Sting has seen a strong 3x-4x CAGR over CY19-21E and our channel checks suggest that the drink has found new consumers like students, gym-goers and truck drivers, who are using Sting to stay alert and for an energy boost. With VBL’s delivery excellence, we see scope for an upgrade in consensus EPS estimates (see Exhibit 7-9).

Better long-term outlook leads to an upgrade in TP: Front-loading of growth expectations and improvement in our long-term growth outlook to a mid-teen CAGR vs. low-teen earlier has led to an upgrade in the P/E multiple to 35x from implied 28x earlier. Potential market share gains led by VBL’s operational excellence and lower per-capita spends on hydration in India improve our long-term growth confidence in VBL. We reiterate Buy with a revised TP of Rs1,120 (based on a higher 35x Sep’23E EPS vs. implied 28x earlier). Our TP is also backed by a 2-stage DDM (see Exhibit 11). Higher seasonality and volatility in international operations remain key downside risks to our estimates.

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