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Capacity expansion plans on track

Key takeaways from Q4CY21 results: (1) revenue grew 30.3% YoY, led by volume growth of 28.7% YoY and higher realisations by 1.2% YoY and (2) gross and EBITDA margin declined 476bps and 96bps YoY, respectively. The company added 40,000 visi-coolers during the year. The company is on schedule to operationalise its manufacturing facilities in Bihar and J&K by Mar’22. Varun plans to expand its distribution by 10-15% in CY22. With an increase in input prices and freight cost, we cut our earnings estimates for CY22E. We model Varun to report a PAT CAGR of 29.3% over CY21-23 with an improving RoE. We maintain ADD with a revised target price of Rs1,000 (37x CY23E; earlier TP: Rs930).

Q4CY21 and CY21 results: Varun reported revenue and EBITDA growth of 30.3% and 20.5% YoY, respectively, in Q4CY21. Volume growth was 28.7% YoY and net realizations per case improved 1.2% YoY. Net realizations during the year were up 2.2%. Gross and EBITDA margin declined 476bps and 96bps YoY, respectively, due to higher input prices. Despite non-seasonal quarter, the company reported profits in Q4CY2 due lower interest cost, operating leverage and improved profitability of the international business. Varun generated RoE of 16.3% in CY21, up from 8.3% in CY20.

Segment-wise performance: CSD, Juice and Packaged drinking water formed 61%, 5% and 34% of the company’s volumes in Q4CY21 and reported growth of 23.6%, 50% and 35.7% YoY, respectively. Volume growth in both domestic and international markets helped the company to report strong revenue growth. Sting grew ~440% during the year to contribute 5% of the sales mix

Geographical expansion: We believe Bihar and Jammu & Kashmir manufacturing facilities would be operational by Mar’22. In its outside India business, the company will also start supplying its products in Democratic Republic of Congo from its facilities located in Morocco and Zambia.

Expansion of distribution network: The distribution network continues to be ~2mn retail outlets. There was closure of some hotels/stores due to covid. Also, there were difficulties to expand distribution considering travel restrictions over the past 18 months. However, the company plans to expand distribution by 10-15% in coming quarters. The company added 40,000 visi-coolers during CY21.

Maintain ADD: We model Varun to report revenue and PAT CAGRs of 13.8% and 29.3%, respectively, over CY21-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 Rs1,000 (37x CY23E)

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