Buy Varun Beverages Ltd for the Target Rs 525 by Emkay Global Financial Services Ltd
We maintain BUY on VBL, while cutting our TP by ~15% to Rs525 (40x Jun-28E EPS vs 5Y mean of 47x). We cut TP due to a 3-4% earnings cut and ~11% cut in our target multiple on multiple climate-related disruptions in the peak season over CY23-26. However, we retain BUY led by a strong execution track record (~17% India growth over CY19-25), continued outperformance vs FMCG peers, and growth-oriented management. India topline growth of ~13% in 1Q (2Y CAGR of ~2%) was impacted by climatic disruptions in Apr-26 (flat volume growth), though Mar/May/Jun-26 saw healthy volume growth of >20%. The organic international volume growth was robust at ~25% (~39%, including Twizza), backed by broad-based performance across geographies. VBL is relatively better placed than peers in terms of margin, with strategic stocking of raw material (RM) and growing share of low-/no-sugar products (73% mix in 1HCY26) – this was reflected in the 2Q EBITDA margin gain of ~40bps in India business, despite peak geo-political tensions. Regarding investments in 1HCY26, VBL incurred organic capex of Rs11.4bn in 1H, acquired Twizza for Rs11.3bn, and made an investment of Rs0.8bn in JVs.
Topline performance in-line; flattish April impacts volume growth in India
VBL’s revenue grew 20.4% to Rs84bn (in line with our estimate), led by ~43% growth in International revenue and ~13% growth in India operations. India volume growth stood at 14.4% yoy, impacted by flattish volumes in April due to adverse weather. Excluding April, volume growth has been tracking the twenties since the onset of the season (March). Encouragingly, growth momentum has sustained in July. International volume was up ~39% yoy (ex-Twizza, ~25% yoy growth), leading to consolidated volume growth of ~20%. Consolidated realization (for beverages) at Rs175.3/case was up 1.2%, supported by better realization in the international business while realization in the domestic business was down 0.6%. Consolidated gross margin (GM) at 55% was up by ~50bps yoy, led by a higher share of low sugar/no sugar at 81% (vs 52% in 2QCY25). India EBITDA margin was up by ~40bps, led by lower employee cost partially offset by higher transportation/distribution cost. However, consolidated EBITDA margin at 27.7% was down by ~80bps yoy due to consolidation of the Twizza business.
Strong growth in VAD/Nimbooz; selective market expansion of Rs10 price-point
Value-added dairy (VAD) and Nimbooz maintained strong momentum, delivering growth of >40% and 30% yoy, respectively, significantly outpacing VBL’s overall growth. Management reiterated its focus on these categories and continues to expand the product portfolio across multiple price points. It remains selective in expanding the Rs10 pricepoint, deploying it primarily in markets seeing sub-20% growth due to its low profitability. Overall, the mix of Rs10 remains low at the portfolio level.
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