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* Varun Beverages (VBL) reported a revenue growth of 13% YoY in 2QCY23, led by growth in volumes (up 4.7% YoY) and higher realization (up 8.2% YoY to INR179/case). Sales volume growth in India was adversely impacted by abnormally high unseasonal rains throughout the quarter.

* Softening of PET chips prices led to a 200bp YoY improvement in gross margins. Gross margin/unit case grew 12% YoY to INR93.8, while EBITDA/unit case improved 15% YoY to INR48.12, supported by favorable operating leverage.

* We maintain our CY23/CY24/CY25 estimates and reiterate our BUY rating on the stock with a TP of INR940.

Volume growth and higher realization drive sales

* VBL’s revenue grew 13% YoY to INR56.1b (est. INR56.7b), on account of volume growth over the last year (up 4.7% YoY to 314m cases) and higher realization (up 8.2% YoY to INR179/case). Overall volumes increased to 314m unit cases, driven by strong growth in international markets.

* EBITDA margin expanded 170bp YoY to 26.9% (est. 26.2%), primarily driven by improvement in gross margins (up 200bp YoY to 52.5%, due to softening of PET chips prices). EBITDA grew 21% YoY to INR15.1b (est. INR14.8b).

* Adj. PAT grew 26% YoY to INR9.9b (est. INR9.7b), driven by higher sales growth and improvement in margins.

* Subsidiary (consolidated minus standalone) Revenue/EBITDA/PAT grew 59%/37%/2.1x YoY to INR9.4b/INR2b/INR1.3b in 2QCY23.

* CSD/water volumes grew 6%/7% YoY to 232m/59m unit cases, while NCB volumes declined 13% YoY to 23m unit cases.

* For 1HCY23, Revenue/EBITDA/PAT grew 22%/30%/37% to INR95b/INR23.1b /INR14.2b. Volumes grew 12% YoY to 538m cases.

* CFO stood at INR22.1b in 1HCY23, up 26% YoY. Net debt stood at ~INR31.7b as on 30th Jun’23 vs. INR34.1b as on 31st Dec’22.

Highlights from the management commentary

* New growth drivers: The management expects newer products such as energy drinks, juices, Sugar free drinks (Pepsi black), and sports drinks (Gatorade) to perform extremely well going ahead. It has launched Gatorade at INR20 price point and expects strong traction from the product in the next year.

* Dairy-based beverages: VBL is tripling its capacity in the dairy segment. It will capitalize on its robust distribution network and well-established supply chain of existing products for this segment. In fact, no other player in the dairy industry possesses such an extensive and far-reaching distribution network.

* Capex: The company has incurred a capex of ~INR19b in 1HCY23 for greenfield expansion (INR8.5b), brownfield expansion (INR6.5b), international subsidiaries (INR3b), and land acquisition (INR1b).

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