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Earnings in line with our estimates

Varun Beverages (VBL) reported a revenue growth of 21% YoY in 4QCY23, led by strong volume growth (up 18% YoY) and high realization (up 2% YoY to INR171/case).

While we maintain our CY24 earnings, we increase our CY25 earnings estimate by 7%, integrating the recently acquired South African beverage company BevCo’s financials and also increasing volume growth estimate of the existing business to 16%/14% for CY24/25 from 14%/13% earlier estimated. However, higher interest cost, led by increase in debt (capex and acquisition-led increase) partly offsets the increase in earnings. We reiterate our BUY rating on the stock with a TP of INR1,500.

Margin expansion led by favorable operating leverage

VBL’s revenue grew 21% YoY to INR26.7b (est. in line), driven by healthy volume (+18% YoY to 156m cases), while realization grew 2% YoY to INR171/case. Volume growth was driven by both India (18.7% YoY) and international markets (16% YoY).

EBITDA margin expanded 180bp YoY to 15.7% (est. 15.4) on the back of favorable operating leverage. EBITDA grew 36% YoY to INR4.2b (est. in line)

Adj. PAT increased 77% YoY to INR1.3b (est. in line), driven by higher sales growth and improvement in margins.

CSD/Juices/water volumes grew 25%/14%/5% YoY to 106m/8m/42m unit cases in 3QFY24; for CY23, volumes grew 17%/1%/9%, respectively.

For CY23, Revenue/EBITDA/PAT grew 22%/29%/37% to INR163b/INR36.1b/INR20.6b. Volumes grew 14% YoY to ~913m cases.

Net debt as of Dec’23 stood at INR47.3b vs. INR34.1b as of Dec’22, while debt/equity ratio reduced to 0.67x vs. 1.31x.

Highlights from the management commentary

New business: The management is expecting strong growth in Gatorade, Juice, and value-added dairy segment as the production capacity has increased 200%.

Capex: VBL has capitalized ~INR21b in CY23 across greenfield and brownfield expansions, resulting in 45% capacity expansion in CY24. In CY24, the management guided to capitalize ~INR36b.

Deepening of Distribution in India: The company is enhancing its go-tomarket strategy by annually expanding to 400-500k outlets and alongside adding more chilling equipment.

Valuation and view

We expect VBL to maintain its earnings momentum, aided by: 1) increased penetration in newly acquired territories in India and Africa, 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 23%/23%/29% in revenue/EBITDA/PAT over CY23-25.

While we maintain our CY24 earnings, we increase our CY25 earnings estimate by 7%, on account of integrating the recently acquired South African beverage company BevCo’s financials (assumed only six months of integration in CY24) and also increasing the volume growth estimate of the existing business to 16%/14% for CY24/25 from 14%/13% earlier estimated. However, higher interest cost led by an increase in debt (capex and acquisition led increase) partly offsets the increase in earnings.

We value the stock at 57x CY25E EPS to arrive at a TP of INR1,500. We reiterate our BUY rating on the stock.

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