Buy Varun Beverages Ltd For Target Rs.680 by Motilal Oswal Financial Services Ltd
Volume growth led by international market additions
In-line operating performance
* Varun Beverages (VBL) reported a revenue growth of 38% YoY in 4QCY24, led by volume growth of 38% YoY, which was majorly driven by the volume addition from South Africa and the Democratic Republic of Congo (DRC). Excluding these volumes, organic volume growth was ~5% YoY. Realization remained flat YoY at INR172/case.
* VBL ended the year on a high note, with healthy volume growth in India (~11%) and expansion in international markets (through acquisition and greenfield capacity expansion). Management has guided to continue this growth momentum with double-digit volume growth in the domestic market and a much higher growth rate in international markets.
* We largely maintain our CY25/CY26 earnings estimates. We reiterate our BUY rating on the stock with a TP of INR680.
Flat margins YoY impacted by Bevco consolidation
* VBL’s revenue grew 38% YoY to INR36.9 (est. in line) on account of healthy volume growth (+38% YoY to 215m cases). Realization was flat YoY (at INR172/case). International market volumes (excl. South Africa and DRC) grew 8% YoY to 45.2m cases, while India volumes rose ~5% YoY to 119m cases. South Africa and DRC together reported volumes of ~51m cases.
* EBITDA margins were flat YoY at 15.7% (est. 16.3%) due to the consolidation of South Africa business (low margins due to ~80% mix of owned brands and fixed costs associated with new capex). EBIDTA per case inched up 1% YoY to INR27. EBITDA stood at INR5.8b, up 39% YoY (est. in line).
* Adj. PAT grew 40% YoY to INR12.5b (est. INR14.2b), driven by higher sales growth and stable margins YoY, partly offset by higher depreciation (up 57% YoY) and increased finance costs (up 48% YoY; for acquisition of BevCo and setting up four new production facilities).
* Subsidiary (consolidated minus standalone) revenue/EBITDA grew 2x/2.1x YoY to INR18b/INR2.5b, with a net loss of INR235m (vs. adj. PAT of INR133m in 4QCY23).
* CSD/water volumes grew 49%/16% YoY to 158m/49m unit cases, while juice volumes remained flat at 8m unit cases in 4QCY24.
* For CY24, consolidated revenue/EBITDA/adj. PAT grew by 25%/31%/26% YoY to INR200b/INR47.1b/INR26b and total sales volume grew by 23% to 1,124m cases.
* VBL turned net debt free in 4QCY24 through QIP proceeds, and CFO stood at INR33.8b as of CY24 vs. INR23.9b in CY23.
Highlights from the management commentary
* Domestic demand outlook: In the long term, the company expects to sustain double-digit growth and ~21% margins in the Indian market. The Indian beverage market remains largely untapped and continues to grow, with no signs of a slowdown in VBL’s growth trajectory despite rising competition.
* Capex: Projected capex for CY25 is ~INR31b, of which VBL has already spent ~INR16.5m as of Dec’24. The capex is aimed at increasing its total capacity by 25% from the CY24 level by setting up greenfield facilities in India (~INR20b - Prayagraj, Damtal, Buxar & Meghalaya) and snacks manufacturing in international territories.
* International Market: In South Africa, VBL is focusing on increasing the general trade mix (higher margin) vs. heavy mix (40-45%) of modern trade (low margin), thereby improving the margins for the region. In Tanzania, PepsiCo already has a strong foothold, and VBL will enhance its go-to-market strategy, along with building capacities.
Valuation and view
* VBL is expected to maintain its earnings momentum, aided by: 1) increased penetration in newly acquired territories in Africa, 2) stable growth in the domestic market, 3) continued expansion in capacity and distribution reach (10% annual addition in outlets), and 4) growing refrigeration in rural and semirural areas.
* We expect a CAGR of 12%/11%/17% in revenue/EBITDA/PAT over CY24-26.
* We largely maintain our CY25/CY26 earnings estimates. We value the stock at 55x CY26E EPS to arrive at a TP of INR680. We reiterate our BUY rating on the stock.
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