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Cost optimization and better realization drive earnings

Earnings above our estimates

* Varun Beverages (VBL) reported a revenue growth of 11% YoY in 1QCY24, led by volume growth (up 7% YoY) and high realization (up 4% YoY to INR180/case).

* EBITDA margins expanded 240bp YoY, led by improved gross margins (up 390bp YoY). This improvement can be attributed to decreased PET prices, the company’s concentrated efforts to minimize sugar content, and the adoption of lighter packaging materials.

* We largely maintain our CY24/CY25/CY26 earnings. We reiterate our BUY rating on the stock with a TP of INR1,720.

International business drives volume growth

* VBL’s revenue grew 11% YoY to INR43.2b (est. INR42.3b) on account of healthy volume growth (+7% YoY to 240m cases) and high realization (up 4% YoY to INR180/case). Volume growth was driven by international markets (up 22% YoY), while domestic volumes grew 4% YoY on account of delayed seasonality cycle.

* EBITDA margins expanded 240bp YoY to 22.9% (est. 20.9%) on the back of improved gross margins (up 390bp YoY). This improvement can be attributed to decreased PET prices, the company’s concentrated efforts to minimize sugar content, and the adoption of lighter packaging materials. EBITDA stood at INR9.9b, up 24% YoY (est. INR8.85b).

* Adj. PAT grew 25% YoY to INR5.4b (est. INR4.8b), driven by higher sales growth and improvement in margins.

* Subsidiary (consolidated minus standalone) Revenue/EBITDA/PAT grew 30%/33%/21% YoY to INR8.7b/INR1.7b/INR680m in 1QCY24.

* CSD/Juices/water volumes grew 6%/13%/10% YoY to 169m/18m/53m unit cases in 1QCY24.

Highlights from the management commentary

* Outlook: VBL expects strong sales growth in 2QCY24, led by heat waves, elections, and lower base in the corresponding quarter last year. The company witnessed almost ~100% utilizations of the plant in April’24.

* Capex: VBL has planned a capex of ~INR36b, out of which ~INR24b/INR9.5- 10b has already been incurred in CY23/1QCY24. It plans to incur the pending capex (~INR2b) in the coming quarters. VBL has commissioned three Greenfield facilities in CY24 YTD.

* Debt: The company targets to keep debt-to-equity ratio in the range of 0.6 to 0.7x. It expects to return to these levels in the next couple of quarters. Debt levels by the end of CY24 will be similar to that as of at the end of CY23.

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 21%/22%/29% in revenue/EBITDA/PAT over CY23-26.

* We largely maintain our CY24/CY25/CY26 earnings. We value the stock at 57x Jun’26E EPS to arrive at a TP of INR1,720. We reiterate our BUY rating on the stock

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