Buy Varun Beverages Ltd For Target Rs.460 by Choice Institutional Equities
Q3CY26 Margin Impacted on Higher Raw Material Cost
Q3CY26 Margin Impacted on Higher Raw Material Cost VBL reported revenue and profitability ahead of estimate, driven by a strong volume growth of 29% YoY, led by 22% growth in India and 39% in international markets. Beverage realisation per case improved 2.2% YoY to INR 177, supported by premiumisation, a favourable product mix and trade-spend rationalisation. Gross margin was impacted by higher packaging cost (~300 bps) and increased sales of non-beverage products (preforms and caps) in India (~100 bps). However, the management indicated that gross margins have likely bottomed out in Q3CY26, barring fresh macroeconomic disruption.
Outlook
VBL expects a sustained healthy volume growth, with long-term double-digit growth potential across India and Africa. India growth will be driven by distribution expansion, premiumisation and product innovation, while international growth will be supported by capacity expansion and strong demand across key Africa markets.
Q3CY26: Profitability ahead of Estimate; Margin Impacted
* Revenue grew 33.2% YoY and declined 22.7% QoQ to INR 66,076 Mn (vs. CIE estimate of INR 61,053 Mn). Consolidated volume grew 29% YoY (vs. CIE estimate of 23% YoY) led by 22.5% growth in India and 39.9% growth in international markets.
* EBITDA grew 25.1% YoY and declined 38.8% QoQ to INR 14,267 Mn (vs. CIE estimate of INR 13,990 Mn), EBITDA margin contracted 140 bps YoY and 570 bps QoQ to 21.6% (vs. CIE estimate of 22.9%), owing to raw material inflation.
* PAT grew 13.6% YoY and declined 45.0% QoQ to INR 8,329 Mn (vs. CIE estimate of INR 8,058 Mn)
Valuation:
We have cut our CY26/CY27E earnings estimates by 10%/6%, respectively, and revised our target multiple to 35x Sep-28E EPS (earlier 40x) to factor in the impact of higher raw material inflation headwinds. However, we remain constructive on VBL's long term growth prospects, driven by India's underpenetrated distribution expansion, Africa led international expansion and portfolio diversification beyond core beverages. We estimate Revenue/EBITDA/PAT CAGR of 16%/15%/16% over CY25–28E, respectively. We maintain our BUY rating with a revised TP of INR 460 (earlier INR 550), implying 16% upside from the current market price
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