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Outlook sturdy

Strong growth in international markets drives Q1 volumes

In Q1CY24, Varun Beverages’ (VBL IN) net sales grew 10.9% YoY (versus our estimate of 6% growth) as volume surged 7.2% YoY, led by strong volume growth in the international markets (up 21.9% YoY). Despite the 17-day delay in the Holi festival affecting the seasonality cycle, India business reported a 4.4% volume growth in Q1. Overall, realization per case rose by 3.5% YoY to INR 179.7, mainly due to better product mix in India and higher contribution from the international markets, which typically yield higher realizations compared with India. VBL indicated a better Q2 due to favorable weather and sales shift (from Q1) owing to delayed Holi and early Ramadan.

Capacity expansion and new markets to bolster growth

VBL commercialized three new greenfield plants in India (in Maharashtra, Uttar Pradesh and Odisha), thus boosting overall capacity by 45% since CY22, crucial for meeting peak summer demand. Also, growth levers include: 1. acquisition of the South Africa market, ripe with potential due to regional brand dominance, 2. venturing into the Democratic Republic of the Congo (DRC), unoccupied by Pepsi, and 3. securing a license to produce Cheetos in Morocco, starting May ’25, complementing its existing snacks distribution agreement.

Favorable input pricing improved margins

In Q1, EBITDA margin improved 240bps YoY to 22.9% (versus our estimate of 21.3%), primarily due to softening of PET chips prices and VBL’sfocus on reducing sugar content (46% of total volume comes from low/no sugar products), partly offset by increase in other expenses associated with the acquisition of new territories and commissioning of new plants. The management maintained its conservative EBITDA margin guidance of 21-22% for FY25.

Valuation: reiterate Accumulate with higher TP of INR 1,590

We up CY24E/25E earnings estimates 6.6%/8.6% to factor in higher revenue growth from new market expansion and improved volume growth outlook for India business. Reiterate Accumulate with a higher TP of INR 1,590 from INR 1,463, as we assign 55x (unchanged) CY25E EPS. Key downside risk is lower-than-estimated volume growth.

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