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Strong volume growth on demand recovery

* Varun Beverages (VBL) reported a strong operating performance on the back of higher volume growth across the Carbonated Soft Drinks (CSD) and NonCarbonated Beverages (NCB) segments. Volumes increased 32% YoY to 151m unit-cases. This was primarily led by an increase in out-of-home consumption, coupled with strong demand for newly launched products in the NCB segment.

* 1QCY21 revenue/EBITDA numbers were marginally better than our estimates. However, we decrease our revenue/earnings estimate for CY21 by 4%/16%, primarily due to the partial lockdowns imposed across several states – which is expected to affect volumes during the peak season over Apr–Jun’21 and delay expansion plans in the south and west regions. We retain our earnings estimate for CY22E. Maintain Buy.

CSD and NCB boost quarterly sales volumes

* Revenue increased 34% YoY to INR22.4b (est.: INR21.5b), primarily led by robust volume growth across the CSD and NCB segments. This was largely attributable to the resurgence in demand and a lower base case in 1QCY20. Overall volumes increased 32% YoY to 151m cases. Gross margins contracted 290bp to 55.8% (est.: 57.3%) due to a change in the product mix and lower gross margins from international operations.

* EBITDA/unit-case rose 6% YoY to INR25.3/unit-case on a better product mix. The EBITDA margin expanded 90bp YoY to 17% (est.: 16.7%) and EBITDA stood at INR3.8b (up 41% YoY). Adj. PAT increased 2.5x YoY to INR1.3m (est.: INR1.2b).

* Subsidiary (consolidated less standalone) sales/EBITDA grew 22%/24% YoY to INR4.4b/INR0.6b in 1QCY21. Adj. PAT stood at INR40m in 1QCY21 v/s net loss of INR220m in 1QCY20.

* CSD volumes increased 39% YoY to 106m unit-cases. Volumes were driven by demand returning to normalcy, along with an increase in out-of-home/inhome CSD consumption.

* NCB volumes grew 38% YoY to 11m unit-cases on the back of sharp growth in newly launched energy drinks, Tropicana, and other new products (Mountain Dew – Ice).

* Water volumes surged 13% YoY to 34m unit-cases, primarily driven by international geographies – the share of the Water segment is comparatively higher than that of CSD/NCB in international geographies.

Highlights from management commentary

* Apr’21 performance: VBL did not face any major supply chain issues in Apr’21. Post Apr’21, some states are expected to face minor hurdles due to regional lockdowns being imposed. The closure of hotels and retail shops in certain geographies is affecting volumes in these regions. Rural is performing better v/s urban on account of lenient restrictions in the former.

* South/West performance: South and west volumes are gradually picking up; the regions are expected to contribute significantly over the next few years. Expansion plans were once again affected due to lockdowns being imposed in Maharashtra and certain other states. However, VBL managed to add substantial visi-coolers and new vehicles in 1QCY21, leading to sharp volume growth.

Valuation and view

* We expect the volume growth trajectory to continue over the next few years, driven by: a) the pure monopoly play in PepsiCo India’s business, b) an increase in on-the-go consumption across product segments, c) increasing volumes from the newly acquired regions (south and west), d) a diversifying product portfolio, coupled with new launches, and e) growing refrigeration penetration in rural/semi-rural areas.

* 1QCY21 revenue/EBITDA numbers were marginally better than our estimates. However, we decrease our revenue/earnings estimate by 4%/16% in CY21, primarily due to partial lockdowns being imposed across several states – which would affect volumes during the peak season of Apr–June’21 and delay expansion plans in the south and west regions. We maintain our earnings estimate for CY22E.

* We expect a revenue/EBITDA/PAT CAGR of 13%/15%/32% over CY19–22E. We value the stock at 31x CY22E EPS. Our TP of INR1,150 implies a 15% upside. Maintain Buy.

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