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VBL’s Q3CY23 EBITDA was 3-4% above estimates, led by 8% better EBITDA in India and 14% lower Intl. EBITDA due to FX fluctuation. Revenue growth was robust at 22%, led by broad-based volume growth of 16% and realization gain of 5%. India has seen a strong recovery post a weak summer (unseasonal rains). Gross margin was better with improved mix, RM moderation and curtailed discounts. The beverage category is outperforming other FMCG categories on under-penetration and improved road/electricity infra. VBL has identified these tailwinds and has invested ~Rs30bn for capacity expansion (+45% vs. CY22). Further, VBL is benefiting from new products at affordable price-points (Energy/Sports/Dairy), which should together drive EBITDA/EPS CAGR of 25-30% over CY22-25E. We markup TP by 14%, led by 7% rise each in the EPS and multiple. The multiple increase is on reducing seasonality and outperformance vs. FMCG peers; retain BUY with Rs1,150 TP (45x CY25E EPS).

Varun Beverages: Financial Snapshot (Consolidated)

Robust trends continue with 22%/32% revenue/PAT growth for VBL

VBL posted revenue growth of 22% in Q3, led by 16%/5% growth in volume/realization. Among geographies, India grew 16%, while the intl. business saw higher growth at 45%. Encouragingly, India volume rebounded in Q3 vs. 1% in Q2, which was impacted by unseasonal rains; Intl. volume was up 16%. Realization was flat for India due to price corrections/weaker mix (less juice), but offset by the lower discounts. Intl. realization improved 25% on higher GTM and better mix. Among categories, carbonates led with 20% volume growth, while juice/water grew a slower 0%/9%. EBITDA margin improved by 80bps to ~23%, largely led by 160bps gain in gross margin (GM). GM gains was driven by controlled discounts and softening of PET chips’ prices. Among geographies, India EBITDA margin (standalone) improved by 480bps, while subsidiary margin (consolstandalone) dipped by 1,010bps. VBL has capitalized Rs20bn capex in 9MCY23, with Rs11.5bn into greenfield capacities (Rajasthan/MP/Congo) and the balance in brownfield capacity expansions. Of the Rs20bn capex, cash outflow is Rs8bn, as Rs12bn was CWIP increase in CY22. Further, Rs16bn cash has been used in CY23 as CWIP, for plants to be commissioned ahead of the CY24 season which should expand VBL’s capacity by 45%.

Earnings-call KTAs: 1) All plants are expected to commission by Q1, to garner benefit of the next season. 2) With the new facility, VBL will address 50-60% of the Congo market (100mn population vs 60/70mn in Zimbabwe). 3) The new subsidiary in Mozambique will utilize surplus capacity in Zambia/Zimbabwe and expand distribution in bordering areas. Its plan of re-entering the market is backed by the significant gain in consumption appetite, no additional taxes and ease of doing business. 4) Intl. margins were impacted by currency devaluation in Zambia. 5) VBL is witnessing faster growth (double-digit) compared with FMCG peers, led by rural penetration, aggressive GTM strategy, sharp price-points and massive headroom to reach 12.5mn retail outlets (vs. ~3.5mn outlets currently). 6) High double-digit growth witnessed in new categories such as Sting (Blue), Nimbooz (+100%), Gatorade (+70%) and other non-sugar beverages. It also plans to launch a new energy drink in CY24, as the category is seeing healthy demand trends. 7) Seasonality has significantly reduced, with the Jun Qtr contributing ~50% PAT vs. 90-100% earlier. 8) Campa (Reliance) is a formidable competitor, but investments should drive strong expansion for the category and benefit all players.

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