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Domestic business drives volume growth

Earnings below our estimate

*  Varun Beverages (VBL) reported a revenue growth of 29% YoY in 2QCY24, led by volume growth (up 28% YoY). This was primarily driven by a domestic volume growth of 23% YoY due to increased capacity and a strong summer season. However, international volume was flat due to the portfolio transition to zero sugar in Zimbabwe. Realization was flat YoY at INR179/case.

*  Management guided a double-digit volume growth in the domestic market going forward, while international market (mainly Zimbabwe) would rebound to a healthy volume growth from 3QCY24.

*  We largely maintain our CY24/CY25/CY26 earnings estimates. We reiterate our BUY rating on the stock with a TP of INR1,850.

Cost optimization and operating leverage boost earnings growth

*  VBL’s revenue grew 29% YoY to INR73.3b (est. INR77b) on account of a healthy volume growth (+28% YoY to 402m cases), while realization was flat YoY (at INR179/case). Volume growth was driven by domestic markets (up 23% YoY), while international market remained flat YoY due to seasonality and the portfolio transition impact in Zimbabwe (to zero sugar products).

*  EBITDA margin expanded 70bp YoY to 27.7% (est. 27.8%) on the back of improved gross margins (up 220bp YoY). This improvement can be attributed to timely procurement and storage of PET chips, the company’s concentrated efforts to minimize sugar content, and the adoption of lighter packaging materials. EBIDTA per case grew by 3% YoY to INR49.6. EBITDA stood at INR20b, up 32% YoY (est. INR21.1b).

*  Adj. PAT grew 26% YoY to INR12.5b (est. INR14.2b), driven by higher sales growth and improvement in margins partly offset by higher depreciation, up 41% YoY (due to the acquisition of BevCo and setting-up of new production facilities), and increased finance costs, up 86% YoY (due to higher stocking of PET chips; as it was an arbitrage between savings in cost of goods sold and enhanced interest costs).

*  Subsidiary (consolidated minus standalone) revenue/EBITDA grew 49%/24% YoY to INR15.3b/INR2.5b; however, Adj. PAT declined 19% YoY to INR1b in 2QCY24.

*  CSD/Juices/water volumes grew 32%/39%/7% YoY to 306m/32m/63m unit cases in 2QCY24.

*  For 1HCY24, Revenue/EBITDA/Adj. PAT grew by 22%/29%/26% to INR117b/INR29.8b/INR17.9b. Net debt as on Jun’24 stood at INR58.8b vs. INR47.3b as on Dec’23.

Highlights from the management commentary

*  Outlook: VBL expects healthy double-digit volume growth in 3QCY24/CY24 led by a healthy volume growth in the domestic market (double-digit) and a volume recovery in the international market from 3Q (ramp up of DRC plant).

*  Capex: VBL has incurred a total capex of INR18b in 1HCY24, of which the company spent ~INR12b/INR6b on assets to be capitalized in CY24/CY25. The company plans to spend ~INR10b in 2HCY24 for the assets to be capitalized in CY25 (i.e., capitalization in CY25 to be ~INR25-26b)

*  DRC: VBL started commercial production of CSD and water at a greenfield facility in DRC. The DRC will be a big opportunity as it is a 100m population region situated on the Equator (i.e., summer throughout the year).

Valuation and view

*  We expect VBL to maintain its earnings momentum, aided by: 1) increased penetration in newly acquired territories in 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%/27% in revenue/EBITDA/PAT over CY23-26.

*  We largely maintain our CY24/CY25/CY26 earnings estimates. We value the stock at 60x Sep’26E EPS to arrive at our TP of INR1,850. We reiterate our BUY rating on the stock.

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