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Operating leverage drives earnings

Earnings above our estimates

* VBL posted strong revenue growth in 2QCY22, led by robust volume growth (up 97% YoY) and higher realization (up 3%).

* EBIDTA/unit case improved by 11% YoY to INR41.7 on the back of operating leverage and higher realizations, despite inflationary raw material environment impacting gross margin.

* Factoring a better than expected volume and realization growth in 2QCY22, we raise our CY22/CY23/CY24 earnings estimate by 7%/10%/10%

Robust volume growth and better realizations drive sales

* Revenue grew 2x YoY to INR49.5b (est. INR42.8b) on account of robust volume growth and higher realization (up 2.7% YoY to INR165/unit case). Overall volumes grew 97% YoY to 300m unit cases on expansion of its distribution network and strong demand during the peak season, with a return to normalcy. Gross margin contracted by 300bp to 50.5% (est. 51%) due to an increase in preform prices by ~30% over 2QCY21. Gross margin/unit case declined by 3% YoY to INR83.5.

* EBITDA/unit case grew 11% YoY to INR41.7, led by higher realization, on the back of a price hike in select SKUs, reduction in discounts and incentives, and an improvement in the mix. EBITDA margin expanded by 190bp YoY to 25.2% (est. 26.3%). EBITDA grew 2.2x YoY to INR12.5b, led by favorable operating leverage. Employee cost/other expenses, as a percentage of revenue, fell 360bp/130bp YoY to 6.3%/19%.

* Adjusted PAT stood at INR7.9b (est. INR7.1b) v/s INR3.1b in 2QCY21, led by higher growth in revenue from operations, improvement in margin, and transition to a lower tax rate in India.

* Subsidiary (consolidated less standalone) sales/EBITDA grew 31%/41% YoY to INR6.5b/INR1.5b in 2QCY22. Adjusted PAT declined by 16% YoY to INR591m. ? CSD/NCB/water volumes grew 85%/2.4x/2.4x YoY to 218m/26m/55m unit cases.

* CFO stood at INR17.6b in 1HCY22, up 87% YoY. Net debt stood at INR20.5b as on 1HCY22 v/s INR30b as on CY21.

* Revenue/EBITDA/PAT grew 66%/88%/2.4x YoY in 1HCY22 to INR77.8b/ INR17.8b/INR10.7b.

Highlights from the management interaction

* Expanding distribution network: VBL has expanded its overall distribution to more than 3m outlets (including 0.25m international outlets), which aided volume growth. Out of itstotal network, 0.4m outlets are dedicated exclusively to its energy drink: ‘Sting’. At present, juices are distributed via 60-70% of its total outlets.

* Robust demand from under penetrated markets: VBL’s under penetrated territories (with a market share of 15-20%) such as Madhya Pradesh, Odisha, Bihar, Jharkhand, and Chhattisgarh have shown robust growth in 2QCY22. It will keep on improving distribution in under-penetrated markets, with more visi-coolers and vehicles, as the management sees huge growth prospects in such markets.

* Guidance: The management is expecting double-digit volume growth going forward as the juices, energy drink, and dairy products segment are growing very well. It expects to sustain current margin levels, which can improve further if the price of key raw material – PET resins – softens.

Valuation and view

* We expect VBL to maintain its earnings momentum, led by: a) increased penetration in newly acquired territories of South and West India, b) higher acceptance of newly launched products, and c) growing refrigeration in rural and semi-rural areas.

* Factoring better than expected volume and realization growth in 2QCY22, we raise our CY22/CY23/CY24 earnings estimate by 7%/10%/10%

* We expect a revenue/EBITDA/PAT CAGR of 20%/24%/37% over CY21-24. We value the stock at 40x CY24E EPS to arrive at our TP of INR1,110. We maintain our Buy rating.

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