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Operating leverage and higher realization drive earnings

Earnings above our estimates

* VBL posted robust sales growth, supported by strong (19% YoY) volume growth across geographies and higher (6% YoY) realization. Volume growth was led by the early onset of summer in India, translating into higher demand.

* Despite higher input cost, operating performance improved significantly due to higher realization and operating leverage. Consequently, EBIDTA/unit-case improved by 17% YoY to INR29.5.

* Factoring in its 1QCY22 performance, we raise our CY22/CY23 earnings estimate by 7%/6% as the growth trajectory is expected to continue with robust demand from out-of-home consumption and strong support from newly launched products. We maintain our Buy rating with a TP of INR1,230/share.

Demand growth across geographies drives sales

* Revenue rose 26% YoY to INR28.3b (est. INR26.6b), led by strong volume growth and a 6.3% increase in realization per unit case. Overall volumes grew 19% YoY to 179.7m cases. Gross margin contracted by 427bp to 51.5% (est. 54%) on the back of ~30% YoY higher preform/PET chip prices. Gross margin/unit-case declined by 2% YoY to INR81.

* EBITDA/unit-case grew 17% YoY to INR29.5, led by price hikes in select SKUs and higher realization in international markets. EBITDA margin expanded by 175bp YoY to 18.8% (est. 17%). EBITDA grew 39% YoY to INR5.3b due to higher realization and operating leverage, led by strong volume growth. Employee cost/other expenses, as a percentage of revenue, fell 91bp/511bp to 10%/23%.

* Adjusted PAT stood at INR2.5b (est. INR2b) v/s a PAT of INR1.3b in 1QCY21, led by margin improvement, higher profitability in international operations, lower taxation, and lower financing cost. The latter fell by 19% to INR469.6m in 1QCY22 due to lower average cost of borrowing.

* Subsidiary (consolidated less standalone) sales/EBITDA grew 46%/111% YoY to INR6.8b/INR1.3b in 1QCY22. Adjusted PAT grew 14.7x YoY to INR589m.

* CSD volumes increased by 18.5% YoY to 126m unit cases due to growing outof-home consumption, which was driven by resumption of offices and an increase in traveling activity.

* NCB volumes grew 18% YoY to 13m unit cases on the back of robust growth and growing acceptance of newly launched Sting and Tropicana.

* Water volumes surged 20.6% YoY to 41m unit cases on the back of higher growth from the international segment.

* VBL declared a bonus issue in the proportion of 1:2, increasing the total number of equity shares to 649.5m after the bonus issue.

Highlights from the management interaction

* Strong demand environment: VBL sees a strong demand environment across geographies, led by out of home consumption and the early onset of summer. Demand has been robust in new product segments such as Sting, Value Added Dairy, and Tropicana. However, growth was limited due to capacity constraints (100% utilization at present). Once new capacities come on stream (may be by CY23), growth will be exponential.

* Gross margin to improve in 2QCY22: Lower other expense, as a percentage of sales, in 1QCY22 is mostly due to operating leverage, led by higher sales volume. This time around higher discounts were offered due to strong demand. The same is partly reflected in the lower gross margin. The management expects gross margin in 2Q to be higher than 1QCY22 as most of the discounts would be curtailed back.

* Market update from South and West India: Post-acquisition of new markets, the company could do very little as the last two peak seasons were affected due to the COVID-19 pandemic. The management has been focusing on enhancing distribution. This is the first year since it has augmented its distribution and the same is delivering results. VBL is already witnessing accelerated growth from South and West India.

Valuation and view

* We expect the strong recovery to continue going forward, led by: a) growing out-of-home consumption, with the opening up of offices and traveling activity, b) uptick in volumes in new territories, c) robust growth in launched products, and d) growing refrigeration in rural/semi-rural areas.

* Factoring in its 1QCY22 performance, we raise our CY22/CY23 earnings estimate by 7%/6% as the growth trajectory is expected to continue with robust demand from out-of-home consumption and strong support from newly launched products.

* We expect a revenue/EBITDA/PAT CAGR of 16%/21%/38% over CY21-23. We value the stock at 40x CY23E EPS. Our TP of INR1,230 per share implies 16% upside. We maintain our Buy rating.

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