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Volume growth and higher realization drive sales

Earnings in line with our estimates

* Varun Beverages (VBL) reported a revenue growth of 22% YoY in 3QCY23, led by strong volume growth (up 15.4% YoY) and high realization (up 5.6% YoY to INR176/case) in both India and international regions.

* PET chip prices softened for another quarter, resulting in a 160bp YoY gain in gross margins. Gross margin/EBITDA per unit case each grew by 9% YoY to INR97.8/INR40.1, supported by lower raw material prices.

* We maintain our CY23/CY24/CY25 estimates and reiterate our BUY rating on the stock with a TP of INR1,090.

Low RM prices aids margin expansion

* VBL’s revenue grew 22% YoY to INR38.7b (est. INR38.2b), driven by healthy volume growth (up 15.4% YoY to 220m cases) and higher realization (up ~5% YoY to INR176/case). Volume growth was driven by both India (14.8% YoY) and international markets (17.5% YoY), while realization growth was mainly driven by the international market.

* EBITDA margin expanded 80bp YoY to 22.8% (est. 22.9%), primarily driven by improvements in gross margins (up 160bp YoY to 55.3%, due to softening of PET chip prices). EBITDA grew 26% YoY to INR8.8b (est. INR8.8b).

* Adj. PAT increased by 32% YoY to INR5b (est. INR4.8b), driven by higher sales growth and improvement in margins.

* CSD/water volumes grew 19%/8% YoY to 159m/50m unit cases, while Juices volumes remained flat YoY at 11m unit cases.

* For 9MCY23, Revenue/EBITDA/PAT grew 22%/29%/35% to INR136b/INR31.9b/INR19.2b. Volumes grew 13% YoY to 758m cases.

Highlights from the management commentary

* Energy Drink: The company is currently working with PepsiCo to launch one more energy drink brand next year.

* International Business: VBL is setting up a greenfield plant in Democratic Republic of Congo with an annual capacity of ~35-40m cases. The plant will be ready for production by Apr-May'24. It has also formed a subsidiary in Mozambique for beverage distribution.

* Capex: The company has incurred a total capex of ~INR24b in 9MCY23, of which INR8b was spent for capacities (both greenfield and brownfield), which was commissioned in 9MCY23, and the balance INR16b was for capacities coming up by Mar’24

Valuation and view

* We expect VBL to maintain its earnings momentum, aided by: 1) increased penetration in newly acquired territories in South and West India, 2) higher acceptance of newly launched products, 3) continued expansion in capacity and distribution reach, 4) growing refrigeration in rural and semi-rural areas, and 5) a scale-up in international operations.

* We expect a CAGR of 17%/20%/26% in revenue/EBITDA/PAT over CY22-25. We value the stock at 47x CY25E EPS to arrive at a TP of INR1,090. We reiterate our BUY rating on the stock.

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