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Strong delivery enhances confidence in growth

* VBL’s revenues were 10-13% ahead of our/Street estimates. Adj. for Rs408mn one-off tax penalty in top-line, margins were in line with estimates. Op. leverage, led by 2-yr volume CAGR of ~11%, helped offset the 200bps gross margin decline due to PET price increase.

* Except for the Covid-impacted May-Jun’21 period, VBL has seen strong double-digit volume CAGR in rest of YTD CY21. Category-wise, Water/Juices saw a healthy 7-9% CAGR and Carbonates saw a higher 12% CAGR on strong traction in energy drink Sting.

* VBL indicated Rs4.8bn capex for a bottling plant in Begusarai (Rs2.9bn) to better service the under-penetrated Bihar market and a pre-form plant in J&K (Rs1.9bn) to build backend efficiencies, in the next two quarters. VBL has reduced its debt by Rs6bn in CY21TD.

* We raise revenue est. by 4-6% on strong delivery but lower margin est. by 50-80bps due to VBL’s preference for growth over margin gains. Our estimates are 5-10% higher and we see scope for consensus upgrades. Retain Buy with a Dec’22E TP of Rs1,120.

Strong Q3 lays foundation for upcoming season: VBL continued on its strong growth trajectory, with a volume CAGR of 11% in Q3CY21 on a 2-yr basis. Except for the Covidimpacted May-Jun’21 period, VBL has delivered a double-digit volume CAGR in the rest of YTD CY21, led by improved mobility in on-the-go channel and continuation of healthy demand in in-house consumption. Category-wise, Carbonates (~70% of volumes) have seen a healthy 12% volume CAGR in Q3, aided by multi-fold growth of energy drink Sting (4-5% contribution to volumes within 3 years of launch). Other categories (Juices and Water; ~30% of volumes) have also seen a healthy 7-9% volume CAGR. Better realizations in international operations led to a ~6% CAGR improvement, leading to a revenue CAGR of ~17% in Q3CY21.

Operating leverage helps offset RM inflation: Adj. for the one-off GST penalty (Rs408mn), gross margins declined ~200bps (due to PET price increase). However, operating leverage helped to more than offset this decline, leading to a 90bps improvement in EBITDA margins. Reported Gross/EBITDA margins declined by 280bps/50bps. Going ahead, VBL expects to counter PET inflation with the introduction of lighter PET packs and price hikes (if necessary). In the long term, VBL suggested a preference for growth over margin gains, leading to an increase in our growth assumptions, but a 50-80bps cut in margin expectations for CY21-23E.

Healthy long-term growth potential; maintain Buy: Potential market share gains, led by VBL’s operational excellence and lower per-capita spending on hydration in India, drive our long-term growth confidence in VBL (see Exhibit 13-14). The focus on growth leads to an improvement in our long-term growth expectations, albeit at the cost of a slight moderation in our profitability estimates. We maintain Buy with a TP of Rs1,120 (35x Dec’23E EPS vs. Sep’23E earlier). Our multiple is backed by a 2-stage growth model.

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