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Varun Beverage Limited (VBL) is the second largest franchisee in the world (outside US) of carbonated soft drinks (“CSDs”) and non-carbonated beverages (“NCBs”) sold under PepsiCo’s trademarks. While the 2 nd wave of COVID has impacted sales, we expect a strong recovery, once the unlock is initiated. With adequate capacity to cater to future growth, no major capex is expected in the near term. We expect significant net debt reduction from the internal cash generation and improved profitability.

We initiate coverage with a BUY for a price target of Rs 1,663 (45x CY23E EPS) representing an upside of 48% over the next 18 months.

Our optimism stems from the following:

Revenues to grow at a CAGR of 19.6% over CY20-23E to Rs 11,025.0 crores driven by:

* 18.0% CAGR in volumes of CSD business to 50.6 crore cases.

* 29.6% CAGR in volumes of NCB business to 5.9 crore cases.

* 23.3% CAGR in volumes of packaged drinking water to 16.9 crore cases.

We expect VBL EBITDA margins to improve by ~200bps to 20.6% by CY23E due to the impact of the operating leverage from the improvement in the domestic franchisee share to +85% (~51% in CY18).

With no major capex on the anvil (except a probable Tropicana expansion) given the spare capacity, we expect reduction of net debt to ~Rs 1,200 crores in CY23 from ~Rs 3,000 crores in CY20. This should help lower interest burden over CY20-23 leading to a 48.0% CAGR in net earnings over CY20-23 to Rs 1,066.9 crores in CY23.

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