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Q1 EBITDA was 10-15% ahead of Street/our estimates, led by strong traction in India operations and better mix (smaller cases). While traction in star performer Sting continues, VBL is committing capital to future growth drivers [value-added dairy, juice and sports drink]. With improved affordability, VBL remains confident about demand for new products and plans improving supply by leveraging its two new manufacturing capacities in CY24 and its existing distribution/visi-cooler network. The Q1 beat leads to a 1-2% increase in our EPS estimate, but we see scope for a higher 5-7% increase in Street estimates. Sting has seen huge success, with ~500bps incremental contribution to CY19- 22 CAGR of ~23%, in our view. A similar traction in the new products can surprise positively. We maintain BUY on VBL, with revised TP of Rs1,700/share (vs. Rs1,660 earlier), based on unchanged target multiple of 40x.

Strong growth trends continue in Q1; better revenue-mix drives margin gains

VBL reported revenue growth of 38% in Q1, led by 24%/11% volume/realization CAGR. Among geographies, India led with 48% growth, while the intl. business saw 4% growth. India saw 28% volume growth, backed by continued traction in Sting and broad-based growth across regions. Realization gains of 11% were buoyed by mix improvement (Sting/smaller cases) and price hikes in select SKUs. However, the tailwinds were partially offset by adverse currency fluctuations in Zambia. EBITDA margin improved 170bps to 20.5%, led by 90bps gain in gross margin (GM), with operating leverage accounting for the balance. GM improvement was driven by better mix and slight moderation in RM prices. Among geographies, India’s EBITDA margin (standalone) improved 260bps, while subsidiaries’ margins (Consol. less Standalone) dipped 170bps. We expect normalization of RM costs to drive EBITDA margin-gains for VBL ahead.

Earnings-call takeaways:

i) VBL acknowledged the aggressive plans of Campa (RIL), but believes the India opportunity is large and should not impact the company’s growth prospects. ii) Net debt increased to ~Rs40bn (vs. Rs34bn at end-CY22), due to commissioning of a new facility in Rajasthan and brownfield expansion of 6 plants. However, debt levels shall reduce post the seasonally-strong June quarter. iii) Net capex estimated for CY23 is around Rs15bn (including CWIP), towards new plants in Rajasthan/MP/DRC, the 6 brownfield expansions, and likely CWIP for the UP/MH plants. iv) VBL reiterated its plan to increase distribution by 10-15% in CY23, from ~3mn outlets at CY22-end. v) VBL has improved affordability of Gatorade with launch of the smaller 200ml pack at Rs20 (vs. the 500ml product at Rs50). vi) VBL’s Board has announced final dividend of Re1/share for CY22, and recommended a share split in the 1:2 ratio. vii) Salience: Q1/H1 typically contribute 24%/61% to annual sales. viii) VBL has gradually transitioned >50% of its Intl. business to USD which should help in significant reduction in currency-related challenges. ix) VBL expects addition of 70-80K visi-coolers over CY23, majority of which have already been added, ahead of the peak season. x) The Dairy EBITDA margin is in line with the VBL average, if not better. xi) VBL expects RoCE to improve by 100-125bps annually over coming couple of years. xii) Rural is growing faster than urban towns.

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