Accumulate Varun Beverages Ltd For Target Rs 1,400 - Elara Capital
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Promising volume outlook
Strong growth in India and international markets
In Q4CY23, Varun Beverages’ (VBL IN) net sales grew 20.5% YoY as volume surged 18.2% YoY, led by strong volume growth in both India (+18.9% YoY, four-year CAGR: +16.2%) and international (+13.5% YoY, four-year CAGR: +20.4%) businesses. Overall, realisation per case rose 5.2% YoY to INR 175.7 in CY23, on account of mix-enhancement in favor of smaller SKUs in Indian markets. High unseasonal rains during the peak season resulted in 13.9% volume growth in CY23.
Capacity expansion to bolster next leg of growth
VBL plans a capex of INR 36bn in CY24, with INR 30bn aimed at the Indian markets and the rest at international markets, while net capex in CY23 stood at INR 21 bn. Moreover, VBL is set to increase its production capacity by 45% for the upcoming season from CY22 levels in India, on the back of new greenfield capacities in Rajasthan and Madhya Pradesh and brownfield expansion of six other facilities. The capacity for juices segment will be increased 200% YoY in CY24, thus bolstering growth. Nevertheless, CSD and Energy drinks will be key growth levers for the company. Sting contributed 15% to the overall sales volume in CY23.
Favorable input pricing improved margins
In CY23, gross margin improved 137bps YoY to 53.8%, primarily due to softening of PET chips prices, but partly offset by marginal increase in sugar prices during the year. EBITDA margin expanded 133bps YoY to 22.5%, led by gross margin gains. The management sustains its conservative EBITDA margin guidance at 21-22% going forward as well.
Valuation: reiterate Accumulate with higher TP of INR 1,463
We raise CY24E/25E earnings estimates 6.8%/12.4% to factor in higher revenue growth due to recent acquisition and improved volume growth outlook for India business.
We reiterate Accumulate with a higher TP of INR 1,463 from INR 1,180, as we assign 55x on CY25E (from 45x) given 30% earnings CAGR in CY23-25E, the highest in our FMCG universe. Key downside risk is lower-than-estimated volume growth
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SEBI Registration number is INH000000933
