Buy Varun Beverages Ltd For Target Rs.550 by Choice Institutional Equities Ltd
Twin Engines of Growth: Scaling up India, Expanding in Africa
VBL's growth rests on two growth levers running in parallel. In India, the opportunity is penetration led where VBL reaches only ~4 Mn of an estimated 12 Mn FMCG outlets and per capita consumption (7 litres) remains a fraction of the global level (31 litres), leaving a multi year runway even as Reliance’s Campa and Coca-Cola compete intensely. In international markets, increasingly Africa centric, VBL has methodically built scale through a mix of greenfield entry (DRC, Kenya) and bolt-on M&A (BevCo, Twizza, Crickley Dairy in South Africa), lifting International's share of revenue from 20% in CY21 to 33% in CY25 and estimated to reach ~40% by CY28E
Portfolio Transformation: Beyond Beverages
VBL's distribution network with ~4 Mn India outlets, +1 Mn visi-coolers and an expanding Africa route-to-market is increasingly being used as a platform to cross-sell categories beyond core CSD and water, including value-added dairy, hydration, energy, snacks and, more recently, fermented dairy (Calpis, with Asahi), a beer test (Carlsberg, in Africa) and proposed entry into RTD & alcoholic beverages in India. These categories offer higher realisations, favourable tax treatment or better margins than base CSD, while leveraging infrastructure VBL has already established.
Capital Discipline and Backward Integration Underpin Margin Expansion
VBL’s margin expansion is supported by three key pillars:
(a) Extensive backward integration across preforms, closures, crates, crowns and PET recycling, providing a ~300– 400 bps EBITDA margin advantage versus non-integrated facilities
(b) Disciplined, bolt-on M&A, with acquisitions focussed on strategically adjacent territories and subsequently integrated to improve operating efficiency and margin
(c) Prudent capital allocation, with capex largely funded through internal accruals and debt deployed tactically around major acquisition and expansion cycles. This combination has enabled VBL to expand consolidated EBITDA margin, from ~17% in CY19 to ~23% in CY25 and expected to remain in the range of 23–24% over CY25–CY28E.
Valuation and View:
VBL offers a compelling medium to long term growth opportunity, driven by India’s underpenetrated distribution footprint, Africa led international expansion and portfolio diversification beyond core beverages. Sustained outlet additions, increased contribution from energy, dairy and snacks, along with margin benefits from backward integration and operating leverage, should support Revenue/EBITDA/PAT CAGR of 15%/16%/17% over CY25–28E, respectively. We initiate coverage with a ‘BUY’ rating and a TP of INR 550, valuing the stock at 40x Sep-28E EPS, a ~20% discount to its long-term average PE multiple of 50x. This implies ~31% upside from the current level.
For Detailed Report With Disclaimer Visit. https://choicebroking.in/disclaimer
SEBI Registration no.: INZ 000160131
