Buy Varun Beverages for the Target Rs 560 by Motilal Oswal Financial Services Ltd
Healthy volume growth drives performance Earnings below our estimates
* Varun Beverages (VBL) posted a healthy quarter with ~20% YoY volume growth, led by ~14% in India and ~38% in international geography. Further, net realization per case improved 1.2% at the consolidated level, fueled by realization growth in international territories
* Going forward, VBL is expected to deliver healthy performance, driven by capacity expansion, a strong distribution reach, and continued expansion of its beverage portfolio. Additionally, the ramp-up of international operations, recovery in Zimbabwe, and expansion of the snacks business are expected to support revenue growth and margins.
* We largely maintain our CY26/CY27 earnings estimates and reiterate our BUY rating with a TP of INR560 (based on 45x CY27E EPS, ie. 10% discount to one-year forward five-year average P/E).
Subsidiaries emerge as key growth drivers
* Consol. revenue grew 21% YoY to INR84.5b (est. in line), driven by a 20% YoY growth in volume to 467m cases and an improvement in realization per case by 1.2% to INR175. Sales volumes in India/International grew 14.4%/38.4% YoY.
* EBITDA margin contracted ~80bp YoY to 27.7% (est. 28.5%). EBITDA per case declined 2% YoY to INR50.2. EBITDA grew 17% YoY to ~INR23.4b (est. INR24.6b).
* Depreciation increased by 33.6%, driven by the commissioning of new plants in India last year, which were not present in the base quarter, alongside the acquisition of Twizza in South Africa. Further, finance cost increased by 55.8% on account of the acquisition of Twizza in South Africa in the current quarter.
* In 1HCY26, Revenue/EBITDA/Adj PAT grew 19%/19%/18% to INR150b/INR39b/INR24b. In 1HCY26, consolidated sales volume grew 18% YoY.
* India business revenue/EBITDA/adj. PAT grew 13%/14%/14% to INR59b/INR18b/INR13b in 2QCY26. Sales volume in India business grew 14.4% YoY. EBITDA per case stood flat at INR54.
* The International business (consolidated minus standalone) revenue/EBITDA/adj. PAT jumped 43%/30%/25% YoY to INR26.5b/INR4.6b/INR1.9b in 2QCY26. Sales volume in the international business grew 38.4% YoY. EBITDA per case declined 6% to INR39.
* For 1HCY26, consolidated/standalone/subsidiary business volumes grew 18%/14%/30% YoY. India business EBITDA per case stood flat YoY. Further, international business EBITDA per case stood at 3.5% YoY.
* Overall business CSD/Juice/Water mix stood at 75%/7%/18% in 2QCY26.
* Gross debt stood at INR29.4b as against INR20.2b as of Mar’26. Further, CFO stood at INR25.4b as against INR19.9b as of Mar’26
Valuation and view
* We expect VBL to deliver healthy performance due to:
1) a scale-up in the international market, driven by all geographies
2) strengthening distribution network domestically and globally
3) scale-up of the snacking business, backed by the operationalization of the Morocco and Zimbabwe markets in 2HCY25
4) an expanding product portfolio (recently entered into a franchise agreement with Calpis in Jun’26).
* We expect a CAGR of 15%/15%/17% in revenue/EBITDA/PAT over CY25-27. We largely maintain our CY26/CY27E earnings estimates and reiterate our BUY rating on the stock with a TP of INR560 (based on 45x CY27E EPS, ie. 10% discount to the one-year forward five-year average P/E).
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