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Impressive volume growth continues in CY22…

About the stock Varun Beverage (VBL) is one of the largest franchisees 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 include 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 and Zimbabwe

Q3CY22 Results: Varun Beverages witnessed robust volume growth of 24%.

Sales were up 32.5% YoY led by low base and strong growth in underpenetrated territories

EBITDA was at | 699 crore, up 41.3% YoY, with margins at 22%

Consequent PAT grew 53.3% to | 395.5 crore

What should investors do? Varun Beverage’s share price has given 7.3x return (from | 150 in October 2017 to | 1107 in October 2022).

We revise our CY22 and CY23 revenue and earnings numbers upward after robust volume growth in 9MCY22

Given most positives are already factored in valuation, we change our rating on the stock from BUY to HOLD

Target Price and Valuation: We value the stock at | 1235, valuing the business at 40x CY24 PE

Key triggers for future price performance:

The underpenetrated territories of Bihar, Madhya Pradesh, Jharkhand and acquired southern & western territories are growing to their potential after distribution expansion to 3 million outlets

The growth in newer brands like ‘Sting’ & milk based beverages growing at faster pace, supporting overall volume growth

With strong volume growth & capacity utilisation touching 90%( May), VBL is expanding its capacity by 20% with capex of | 1200 crore in CY23

Alternate Stock Idea: We like Tata Consumer Products in our FMCG coverage.

Strong innovation & premiumisation strategy in salt, tea, Sampann & Soulful in India market expected to drive sales and margins

We value the stock at | 950 on ascribing 55x FY24 earnings multiple

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