Buy Varun Beverages Ltd for the Target Rs. 580 by Motilal Oswal Financial Services Ltd
Muted performance led by prolonged monsoon season
In-line operating performance
* 3QCY25 was a muted quarter for Varun Beverages (VBL) as its revenue grew only ~2% YoY due to prolonged monsoon across India. Consolidated volumes grew ~2.4% YoY (while Indian volumes remained flat; growth was led by international operations, which grew 9% YoY). EBITDA margins also contracted ~50bp YoY to 23.4%.
* VBL is strategically entering the alcoholic beverage segment through a partnership with Carlsberg Breweries A/S to pilot beer sales in the African market. The company aims to leverage its strong distribution network and shared retail channels across the South African regions to efficiently expand its presence in this category.
* We largely maintain our CY25/CY26/CY27 earnings estimates and reiterate our BUY rating on the stock with a TP of INR580 (54x CY26E EPS).
Healthy international performance continues to offset domestic headwinds
* Revenue grew 2% YoY to ~INR49b (in line), driven by a 3% YoY growth in volumes to 274m cases. Realization stood at INR178.1/case vs INR179.7/case in 3QCY24
* EBITDA margins contracted 50bp YoY to 23.4% (est. 23.3%), while EBIDTA per case declined 3% YoY to INR41.9. EBITDA remained flat YoY at ~INR11.5b (in line). Lower margins YoY were due to higher employee expenses, power and fuel costs, and other manufacturing overheads associated with increased in-house backward integration initiatives in the international market
* Adj. PAT grew 20% YoY to INR7.4b (est. INR6.9b), driven by lower finance costs (down 62% YoY) and higher other income (INR1.48b in 3QCY25 vs INR243m in 3QCY24), which includes favorable currency movement in international territories (~INR1b)
* Subsidiary (consolidated minus standalone) revenue/EBITDA/adj. PAT grew 7%/3%/29% YoY to INR18.3b/INR3.6b/INR1.6b in 3QCY25.
* CSD/Juice/Water volumes grew 1%/6%/7% YoY to 202m/12m/60m units in 3QCY25.
Highlights from the management commentary
* Domestic market: While the extended monsoon season temporarily affected consumption trends in India, management remains confident in the strong long-term growth prospects of the domestic beverage industry.
* International beverage market gaining momentum: Zimbabwe and Morocco markets have started recovering, while South Africa continues to grow at a mid-double-digit rate. DRC has faced certain headwinds but is expected to deliver healthy growth in CY26. Nepal and Sri Lanka are growing at a pace similar to that of the Indian market.
* Key changes in the memorandum of association: VBL has announced key changes in it memorandum to include the business of manufacturing, producing, processing, brewing, distilling, refining, blending, bottling, storing, packaging, selling, distributing, trading, dealing, marketing, moving, preserving, stocking, importing, and exporting Ready To Drink (RTD) and other alcoholic beverages of any type or description—including beer, wine, liquor, spirit, brandy, whisky, gin, rum, and vodka—in India and abroad. VBL has also entered into a strategic agreement with Carlsberg Breweries to pilot beer sales in the African market and is exploring opportunities in the growing RTD and alcoholic beverages segment across India as well as other existing international markets.
Valuation and view
* 9MCY25 has been a subdued period for VBL, despite capacity additions, due to an early and prolonged monsoon. However, going forward, we expect VBL to improve its earnings momentum, aided by: 1) a scale-up in the international market, driven by South Africa and recovery in the Zimbabwe market, 2) strengthening of on-ground execution in the Indian market, 3) scale up of the snacking business from CY26 onwards, backed by the operationalization of the Morocco and Zimbabwe markets in 2HCY25, 4) an expanding product portfolio (recently launched an energy drink called ‘Adrenaline Rush’, and 5) ongoing investments in capacity expansion, distribution, and cold chain infrastructure.
* We largely maintain our CY25/CY26/CY27 earnings estimates. We expect a CAGR of 15%/15%/19% in revenue/EBITDA/PAT over CY25E-27. We value the stock at 54x CY26E EPS to arrive at a TP of INR580. We reiterate our BUY rating on the stock.
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