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Focus on strategic expansion continues

VBL’s reported revenues were in line with our estimates, while EBITDA saw a negative deviation of 2.6%. Consol revenues grew by 1.9% YoY to Rs 48,967 mn and consol sales volume increased by 2.4% YoY to 274 mn cases. Gross margins saw an expansion of 119 bps YoY to 56.7%, however this was due to reclassification of some expenses from RM costs to other expenses, resulting from backward integration in international business. EBITDA margins declined by 53 bps YoY against our estimates of slightly higher margins and EBITDA stood at Rs 19,988 mn, largely stable on a YoY basis. PAT saw a positive deviation of 12.6% vs our estimates, majorly due to higher other income on account of favourable FX movement. Reported PAT increased by 19.6% YoY to Rs 7,412 mn. Excluding the FX related income of Rs 1,000 mn, Adj. PAT growth was 6.8% YoY to Rs 6,620 mn, in-line with our estimate.

Resilience in domestic business

Despite the prolonged rainfall in India that impacted consumption, VBL’s domestic business held its ground with largely stable volumes (0.9% drop). Distributor inventories were marginally affected in September due to transition to lower GST rates in juice and water portfolio, but normalised subsequently with replenishment of fresh stock. VBL’s 1/4th domestic portfolio will benefit from the GST rate cut. Competitive intensity has not had a material impact on performance, and management believes it is beneficial for the industry in the long term. The impact on volume growth was largely due to the unfavourable weather patterns, and management has seen return of double-digit growth in regions where the season improved in October. Domestic ASP also remained largely stable YoY, with domestic EBITDA margin contraction of just 27 bps YoY.

International ASPs moderated due inferior product mix, growth to see uptick going ahead

International volumes grew 9.4% YoY, however, net realisations corrected by 2.5% due to higher mix of packaged water in the international markets, leading to a 6.7% YoY growth in international revenue. South Africa and Morocco are performing well, while Zimbabwe and DRC have started seeing improvement. Sustainable double-digit to mid-teens growth is realistic from 1 or 2 quarters down the line.

Territory and portfolio expansion

VBL incorporated a wholly-owned subsidiary in Kenya to explore manufacturing, distribution and selling of beverages. Furthermore, it has entered into an exclusive distribution agreement with Carlsberg Breweries A/S, to test market beer in some of the African territories with the brand ‘Carlsberg’.

Valuation and view

VBL has shown some resilience in domestic business, amid challenging weather patterns, and has seen return of double-digit growth in some territories as weather conditions improved. This growth and largely steady margins are indicating limited impact of competition as of now. On the international front, growth is expected to see an uptick due to strong performance in South Africa and improvement in Zimbabwe and DRC. Strategic expansion foray continues, with the company exploring new territories (Kenya) and new categories (Alco-bev in Africa).

We remain constructive on the stock due to this focus on expansion, and strong execution capabilities of the company. We have moderated our Adj. EPS estimates for CY25/26/27E by 4.5/2.2/1.9%, respectively. We retain our valuation multiple of 52x and roll over to CY27E EPS of Rs 11.8, arriving at a price target of Rs 615 (Rs 605 earlier). With an upside potential of 24%, retain BUY on the shares of Varun Beverages Ltd.

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