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Splendid volume growth…

About the stock: Varun Beverages (VBL) is one of the largest franchisees of PepsiCo globally. The company produces & distributes carbonated drinks, juices & packaged drinking water in six countries including India. 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 and Ladakh), Sri Lanka, Nepal, Morocco, Zambia and Zimbabwe

Q3CY21 Results: Varun Beverages reported strong volume growth of 28.4%

* Sales were up 33% YoY led by a strong recovery in volumes

* EBITDA was at | 494.7 crore, up 29.9% YoY, with margins at 20.6%

* Consequent PAT was at | 257.9 crore (up 59.7% YoY)

What should investors do? Varun Beverage share price has given 4.3x return (from | 195 in November 2016 to | 849 in October 2021).

* We revise our CY21 and CY22 numbers upwards with strong volume growth after the normalisation of mobility

* We maintain our BUY rating on the stock

Target Price and Valuation: We value the stock at | 1020, valuing the business at 23x CY23 EV/EBITDA

Key triggers for future price performance:

* With normalisation of mobility, full-fledged summer season after acquisition of south & west territories is likely to drive robust volume growth

* VBL has launched several new brands in last two years i.e. String, ‘Mountain Dew ICE’, milk based beverages. New products would aid revenues

* Given no major capex in the medium term, the company would be able to completely de-leverage its balance sheet in the next three to four years with strong free cash flow. Reduction in interest cost would boost profitability

Alternate Stock Idea: We 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 & margin expansion possibilities

* Trading at a significant discount to FMCG peers. BUY with TP of | 2,800

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