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Operating performance beat our estimates

* Varun Beverages (VBL) reported strong revenue growth of 38% YoY in 1QCY23, led by robust growth in volumes (up 24.7% YoY) with realization touching INR174/unit (up ~11% YoY).

* Savings in raw material prices and an improved product mix led to a YoY improvement of 90bp in gross margins. Gross margin/unit case grew 12% YoY to INR91.1, while EBITDA/unit case improved 21% YoY to INR35.6, supported by favorable operating leverage.

* Factoring in 1QCY23 performance, we raise our CY23/CY24 earnings estimates by 6%/3% on the back of better-than-expected realization and margins. We reiterate our Buy rating on the stock with a TP of INR1,690.

Better product mix and operating leverage aid margin expansion

* VBL’s revenue surged 38% YoY to INR38.9b (est. INR36.2b), aided by strong volume growth (up 24.7% YoY) and higher realization (up 11% YoY to INR174/ unit case). Overall volumes increased to 224.1m unit cases, driven by strong demand across regions in India.

* EBITDA margin expanded 170bp YoY to 20.5% (est. 19.4%), driven by favorable operating leverage. EBITDA jumped 50% YoY to INR8b (est. INR7b).

* Adj. PAT grew 69% YoY to INR4.3b (est. INR3.8b), driven by higher sales growth, improvement in margins, and transition to a lower tax rate in India.

* Subsidiary sales (consolidated minus standalone) grew 4% YoY to INR6.7b in 1QCY23. EBITDA declined 5% YoY to INR1.3b. Adjusted PAT declined 5% YoY to INR562m during the quarter.

* CSD/NCB/water volumes grew 27%/23%/17% YoY to 160m/16m/48m unit cases.

* Net debt stood at ~INR40b as on 31st March 2023 v/s INR31.1b as on 31st Dec’22.

Highlights from the management commentary

* The management has indicated the majority of 70,000-80,000 visi-coolers planned for CY23 has already been installed. The management plans to increase distribution to tackle competition.

* Capex: The company has incurred majority of the capex planned for CY23 (i.e., INR15b). The company has completed the greenfield production facility at Kota, Rajasthan and brownfield expansion at six facilities. The additional Greenfield plant in Jabalpur, MP, is expected to be operational soon.

* The next key growth driver will be Juices, Value added dairy (VAD), and the sports drink segment for which the company is setting up two plants in Maharashtra and UP, which is to be commissioned next year.

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