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Varun reported robust revenue growth of 32.5% YoY, driven by strong volume growth across segments. It also improved the EBITDA margin by 138bps YoY due to higher gross margin and operating leverage. Company has done well in domestic (vol.gr: 22.1%) and international markets. Varun plans to invest in greenfield and brownfield projects and envisages capex of Rs13bn by Feb’23. It will likely expand production capacity by 20% in CY23. Sting contributed ~12% of the net sales during Q3CY22 and we believe it will be a key revenue growth driver. We model Varun to report a PAT CAGR of 40.3% over CY21-CY24E with an improving RoE and remain positive on the business model. We raise our earnings estimates to factor-in the strong Q3CY22. However, we believe the upside is capped at current valuations (34x CY24E), hence we maintain HOLD with a revised DCFbased target price of Rs1,150 (36x of CY24E EPS; earlier TP: Rs900).

Q3CY22 result: Varun reported revenue and EBITDA growth of 32.5% and 41.3% YoY respectively, in Q3CY22 (3-year revenue and EBITDA CAGRs: 22.2% and 29%). Volume growth was 24.2% YoY and rest of the growth was price-led. While the gross margin increased by 90bps YoY, EBITDA margin was up 138bps YoY due to benefits of operating leverage. Adjusted-PAT was up 53.3% YoY.

Segment-wise performance: CSD, juice and packaged drinking water formed 70%, 5.8% and 24.2% of the company’s volumes in Q3CY22 and reported revenue growth of 23.1%, 37.5% and 24.3% YoY, respectively.

Healthy growth across geographies: Varun reported broad-based growth across both domestic and international geographies. Volume growth in India and international markets was 22.1% and 31.1% YoY. Company has entered into an agreement with PepsiCo to distribute and sell Lays, Doritos and Cheetos in Morocco, which we believe will boost volume growth for the company.

New levers of growth: Sting drove volume growth for Varun in India. Revenue contribution of Sting increased to 12% in Q3CY22. We note dairy and juice products are also performing well. Further, we note Varun has started trial production of Kurkure Puffcorn in Kosi, UP. Varun has entered into an agreement with PepsiCo to distribute & sell Lays, Doritos and Cheetos for the latter in Morocco from Jan’23

Maintain HOLD: We model the company to report revenue and PAT CAGRs of 26.2% and 40.3% respectively, over CY21-CY24E. Company continues to benefit from its relationship with PepsiCo, pan-India distribution network, backward integration, and increased in-home consumption. We maintain our HOLD rating on the stock with a revised DCF-based target price of Rs1,150 (36x CY24E EPS)

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