Hold Varun Beverages Ltd For Target Rs.1,050 - ICICI Direct
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Volumes growing at robust pace…
About the stock: Varun Beverages is one of the largest franchisee of PepsiCo in the world. The company produces & distributes carbonated drinks, juices & packaged drinking water in six countries including India. Some of the PepsiCo brands produced by VBL includes Pepsi, Diet Pepsi, Seven-Up, Mirinda, Mountain Dew, Nimbooz, String, Slice, Tropicana, Aquafina among others
The company has operations in India (except Andhra Pradesh, J&K & Ladakh), Sri-Lanka, Nepal, Morocco, Zambia & Zimbabwe
Q4CY21 Results: Varun Beverages reported splendid volume growth of 28.5%.
Sales were up 30.3% YoY led by strong recovery in volumes
EBITDA was at | 207.6 crore, up 20.5% YoY, with margins at 12%
Consequent PAT was at | 32.6 crore compared to loss of | 7.2 crore
What should investors do? Varun Beverage’s share price has given 5.3x return (from | 178 in February 2017 to | 950 in February 2022).
We revise our CY23 earnings number upwards with strong volume recovery and substantial reduction in debt and, in turn, interest cost
We change our rating on the stock from BUY to HOLD
Target Price and Valuation: We value the stock at | 1050, valuing the business 23x CY23 EV / EBITDA
Key triggers for future price performance:
With normalisation of mobility, full-fledged summer season after acquisition of south & west territories is likely to drive robust volume growth
With normalisation of mobility, full-fledged summer season after acquisition of south & west territories is likely to drive robust volume growth
Given the capex requirement equal to depreciation, VBL would be able to de-leverage its balance sheet in the next three to four years with strong free cash flow. The reduction in interest cost to boost profitability
Alternate Stock Idea: We like Tata Consumer Products in our FMCG coverage
Strong innovation & premiumisation strategy in salt, tea, Sampaan & Soulful in India market expected to drive sales and margins
We value the stock at | 910 on ascribing 55x FY24 earnings multiple
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