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Recovery on fast track…

Varun Beverage (VBL) reported a strong set of results with 33.7% revenue growth led by 33% volume growth. However, consolidated organic volume growth was 24.7% in Q1CY21. The strong growth was led by low base quarter as well as a sharp recovery in out of home activity. Carbonated drinks, juices & water have been consumed largely ‘on the go’. VBL sold 151 million cases during the quarter. Realisation per case improved slightly by 0.6% to 148 per case mainly on account of a change in product mix.

Out of total volumes, 70% comprise carbonated drinks CSD, 7% juices & 23% water. Gross margins contracted 294 bps mainly due to change in product mix & sharp increase in PET resin prices. Operating profit increased 41% to | 381 crore. With the 300 bps saving in employee spends & 77 bps savings in overhead spends, the company was able to improve its operating margins by 86 bps to 17%. PAT increased 127.7% to | 136.8 crore. Adjusting for oneoff spend in base quarter, PAT growth was 25.1%

Rural regions, at-home consumption to drive growth

VBL witnessed ~14% volume decline in CY20 due to lockdown however we are expecting a strong volume recovery 24.9% in CY21. The current summer season is also impacted by the second wave of Covid-19 and subsequent localised lockdown but the supply disruptions are limited this year. Moreover, the company has converted some ‘out of home’ consumption to ‘at-home’ by introducing 1.25 litre family pack.

Further, with expanding distribution in rural regions, the company has seen strong growth in rural regions aided by establishment of Visi-coolers. Though, HORECA segment, which constitutes 10% of volumes, would continue to remain impacted, we believe rural regions and at-home consumption would drive growth for the company. We expect 20.4% revenue CAGR during CY20-22E.

PET resin, sugar prices to pressurise margins

With the increase in crude prices, PET resin prices have also gone up sharply in the last three months. Further, we expect sugar prices to increase ~15% in next one year. We believe these commodity prices would remain firm for a prolonged period of time, which would require certain amount of price hikes. However, we believe it would not be easy to take prices hikes given aggressive competition. Hence, we believe operating margins would remain under pressure. We expect 19.8%, 20.1% operating margins for CY021E, CY22E respectively (pre-Covid period margins were 20.3% in CY19).

Valuation & Outlook

Despite beverage being a discretionary category, the company has been able curtain the impact of pandemic and lockdown in CY20. Further, we believe increase at-home consumption would result in swift recovery in volumes in CY21E and we expect a full recovery in CY22E. With strong volume growth, robust operating margins & declining interest cost (with debt reduction), we expect net profit CAGR of 57.4% in CY20-22E. We value the stock at 20x CY22 EV/EBITDA with a target price of | 1200/share (earlier target price | 965) and revise our recommendation from HOLD to BUY.

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