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Entry in foods business: A DCF accretive move

Varun will start contract manufacturing for Pepsi’s snack brand Kurkure Puffcorn and we believe it is a step in right direction. Depending on the Varun’s progress in Kurkure Puffcorn business, we expect Pepsi to offer more products and regions to Varun. As of now Varun will set up a plant in Uttar Pradesh for Rs200-250mn and will produce Kurkure Puffcorn. While Varun Beverages has not worked on foods portfolio earlier, we believe Jaipuria group has strong understanding of foods value chain due to other group companies like Devyani and Cream bell dairy. We continue to stay positive on the company due to its competitive advantages and strong relationships with Pepsi. We model Varun to report a PAT CAGR of 29.3% over CY21-23E with an improving RoE. We maintain ADD with a revised DCF-based target price of Rs1,030 (38x CY23E; earlier TP: Rs1,000).

Agreement to manufacture Kurkure Puffcorn for PepsiCo: Varun’s board has approved to enter into an agreement to manufacture “Kurkure Puffcorn” for Pepsico India. We expect capital expenditure of Rs200-250mn to set up manufacturing unit in Uttar Pradesh. We note, this is only a contract manufacturing agreement and Varun will not be distributing/ marketing the product.

Signifies strong relationship with PepsiCo: While Varun Beverages is one of the largest bottler of PepsiCo, it had negligible experience of the snacks business. We believe the agreement to manufacture one of latter’s snack brand reiterates the strong relationship and trust of PepsiCo on Varun’s capabilities. We also note Jaipuria group has solid understanding of foods value chain due to its group companies like Devyani and Cream Bell dairy products.

Signaling new business capabilities: While the initial impact of the “Kurkure Puffcorn” business will be negligible on the financial statements Varun, we believe it opens up structural growth opportunity for Varun. Once Varun establishes its snacks manufacturing capabilities and gains experience/ expertise of the business, it will likely attract more opportunities for manufacturing of other food brands of Pepsi.

Maintain ADD: We model Varun to report revenue and PAT CAGRs of 13.8% and 29.3%, respectively, over CY21-CY23E, and have return ratios in excess of cost of capital. It continues to benefit from its relationship with PepsiCo, pan-India distribution, backward integration, and increase in in-home consumption. We maintain ADD rating on the stock with a revised DCF-based target price of Rs1,030 (38x CY23E). Key risks: Steep rise in competitive pressures/ delay in launch of new products and higher raw material prices

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