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Multiple tailwinds to drive growth

We model Varun to be net beneficiary of normalcy returning to the domestic as well as international markets and revival in out-of-home consumption. We also note the company is benefitting due to increase in in-home consumption. It also plans to come out with new unit at Bihar to cater to underpenetrated region of Central and East India. Varun plans to expand its distribution by 10-15% in CY22. While increase in input prices and freight cost remains a challenge, we model the company to maintain EBITDA margins of ~19.5% over CY22-23 via judicious price hikes and cost saving initiatives. We model Varun to report PAT CAGR of 44.8% over CY20-23 with improving RoE. Maintain ADD with target price of Rs920 (35x CY23E; Earlier TP-Rs840).

* Q3CY21 results: Varun reported revenue, EBITDA and PAT growth of 33%, 29.9% and 56.9% YoY, respectively. Volume growth was 28.6% YoY and net realizations per case improved 3.6%. Gross and EBITDA margin declined 278bps and 50bps YoY, respectively, due to higher input prices. CSD, Juice and Packaged drinking water formed 71%, 5% and 24% of company’s volumes in Q3CY21.

* Expansion of distribution network: The distribution network is ~2mn retail outlets. There was closure of some hotels/ stores due to covid. Also, there were difficulties to expand distribution considering travel restrictions over past 18 months. However, the company plans to expand distribution by 10-15% in coming quarters. The distribution expansion will be largely in underpenetrated regions and recently acquired regions of West and South India.

* Revival across markets: With normalcy returning countries, we expect Varun to report strong growth in out-of-home consumption. The in-home consumption of beverages also remains heathy. The company has also witnessed healthy some of the underpenetrated regions such as Bihar, Jharkhand, Orissa, Madhya Pradesh and Chhattisgarh. The company also plans capex at Bihar to cater to these markets.

* Increase in input costs: While there is increase in raw material prices, the company has covered raw materials for the full year. However, if the PET prices (led by higher crude oil prices) continue to rise in coming months, they need to raise prices. There is also increase in freight cost led by higher diesel prices.

* Maintain ADD: We model Varun to report revenue and PAT CAGRs of 20.2% and 44.8% respectively over CY20-CY23E. It continues to benefit from its relationship with PepsiCo, pan-India distribution, backward integration, and increase in in-home consumption. Maintain ADD with DCF-based target price of Rs920 (35x CY23E).

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