Buy Varun Beverages Ltd For the Target Rs. 590 By the Axis Securites
Temporary Topline Blip, Long-Term Growth Intact; Maintain BUY
Est. Vs. Actual for Q2CY25: Revenue – BEAT ; EBITDA – BEAT ; PAT – BEAT
Changes in Estimates post Q2CY25
CY25E/CY26E: Revenue: -4%/-4%; EBITDA: -2%/-1%; PAT:-2%/-2%
Recommendation Rationale
• Volume Dips, but Global Growth Cushions the Blow: In Q2CY25, the company’s consolidated sales volume declined 3% YoY to ~390 Mn cases. In India, volumes were adversely impacted by abnormally high and unseasonal rainfall throughout the quarter, leading to a 7.1% decline. However, this was partially offset by strong performance in international markets, where volumes grew 15.1%, led by a 16.1% increase in South Africa. Realisation per case at the consolidated level rose by 0.5%, supported by a 6.6% improvement in international markets.
• Margin Performance: EBITDA margin expanded 82 bps YoY to 28.5% in Q2CY25, despite elevated fixed costs from newly commissioned greenfield plants that are yet to ramp up volumes. The margin improvement was supported by operational efficiencies, stronger international currencies, and deeper backward integration. Low- and no-sugar products accounted for 55% of the total sales volume.
• Manufacturing Footprint Expansion: The newly commissioned greenfield plants at Prayagraj, Damtal, Buxar, and Mendi Pathar are expected to bolster capacity and improve logistics efficiency in high-potential, under-penetrated markets. Coupled with an increased deployment of distribution assets such as visi-coolers, this expanded footprint strategically positions VBL to capture the anticipated demand recovery and support sustained, profitable growth
Sector Outlook: Positive
Company Outlook & Guidance: Despite temporary disruption from unseasonal rains during peak summer, VBL’s structural growth drivers remain intact. We expect the company to sustain strong momentum over the medium to long term and maintain our BUY rating on the stock.
Current Valuation: 38xMar-27EPS (Earlier: 42xMar-27EPS)
Current TP: Rs 590/share (Earlier TP: Rs 650/ share)
Recommendation: With a 15% upside potential from the CMP, we maintain our BUY rating on the stock.
Financial Performance
Revenue declined by 2.5% YoY in Q2CY25, impacted by the unusual early onset of monsoon rains across India. Consolidated sales volumes dropped 3% YoY to 389.7 Mn cases, with a 7.1% decline in India partly offset by a 15.1% growth in international markets. Realisation per case at the consolidated level improved marginally by 0.5% YoY, aided by a favourable product mix internationally. Gross margins contracted by 17 bps YoY to 54.5%. However, EBITDA margin expanded by 82 bps YoY to 28.5%, driven by operational efficiencies. PAT grew 5% YoY to Rs 1,317 Cr, primarily supported by lower finance costs.
Outlook: VBL is expected to sustain its strong growth momentum supported by multiple strategic drivers. These include: 1) The successful acquisition of BevCo, strengthening its footprint in South Africa and DRC; 2) Expansion of its snacks portfolio beyond India, particularly in Zimbabwe and Zambia; 3) Continued efforts to enhance distribution reach, with a focus on rural penetration; 4) Commissioning of several greenfield and brownfield facilities, boosting manufacturing capacity and market access while optimising logistics costs; and 5) Ongoing expansion of the high-margin Sting energy drink, coupled with a sharper focus on value-added dairy, sports drinks (Gatorade), and juice categories. These initiatives are expected to reinforce the company’s long-term growth trajectory and profitability
Other Concall Highlights
H1CY25 Capex Update
During H1CY25, Varun Beverages capitalized net assets worth ~Rs 2,500 Cr, largely driven by:
• Rs 1,450 Cr for setting up four greenfield plants in Prayagraj, Buxar, Damtal, and Mendipathar.
• Rs 120 Cr for brownfield expansion in Sricity (India).
• Rs 450 Cr in international markets, backward integration in DRC, a snacks plant in Morocco, and a canning line in South Africa.
Remaining capex was directed towards visi-coolers, glass bottles, pallets, vehicles, and logistics. As of June 30, 2025, CWIP stood at ~Rs 600 Cr, mainly for Phase II work at greenfield expansion in India and the upcoming snacks plant in Zimbabwe. The investments reflect VBL’s strategy of expanding capacity, strengthening backward integration, and scaling international operations.
New Capacity additions in Q2CY25
VBL commissioned new production facilities across four greenfield locations in India:
• Prayagraj (UP): 4 CSD lines, 1 JBD line, and 1 water line
• Damtal (HP): 2 CSD lines, 1 JBD line
• Buxar (Bihar): 2 CSD lines, 2 JBD lines, 1 water line
• Mendipathar (Meghalaya): 2 CSD lines, 2 JBD lines
Additionally, commercial production of PepsiCo’s snacks brand Cheetos commenced at VBL’s Morocco facility during the quarter ended 30 June 2025.
Distribution Expansion
VBL currently reaches ~4 Mn outlets and aims to expand its footprint by 10% in CY25, adding 3–4 Lc outlets. The year-end target is expected to be slightly below 4.3–4.4 Mn outlets, reflecting steady progress in market penetration.
International Business
Zimbabwe's performance is stabilising after a temporary dip caused by sugar tax and price hikes, with volumes returning to normal and growth expected in the upcoming quarter. The snacks plant in Morocco commenced production in June and received a positive market response. Zimbabwe’s snacks plant is set to begin operations by October–November, with distribution already started in Zimbabwe and Zambia. Other international markets—including Morocco, South Africa, Zambia, and DRC—are performing well, supporting VBL’s overall global growth momentum
Beverage mix
For Q2CY25, CSG's non-carbonated beverages accounted for 75% of total sales, with packaged drinking water contributing 18%. Further, in Q2CY25, CSD salience declined, impacted by unseasonal rains and fewer outdoor events. As per the management, contrary to expectations, smaller packs continued to perform well due to attractive price points, while larger pack sales saw a sharper decline, affecting overall ASP. The trend reflects a shift in consumption patterns amid subdued out-of-home occasions.
Strategic JV for Cooling Infrastructure Expansion in India
VBL has entered into a 50:50 joint venture with Everest International Holdings, a Sri Lankan-based company, to incorporate White Peak Refrigeration Pvt. Ltd. in India. The new entity will operate in the visi-cooler and refrigeration equipment manufacturing space to strengthen VBL’s cooling infrastructure, particularly for South and West India. The JV will have a total paid-up capital of Rs 42.5 Cr, with both partners subscribing equally (Rs 21.25 Cr each) in cash at a face value of Rs 10 per share.
Key Risks to Our Estimates and TP
• Increase in competitive intensity, RM inflation, weakening of the demand environment, and forex fluctuations
For More Axis Securities Disclaimer https://simplehai.axisdirect.in/disclaimer-home SEBI Registration number is INZ000161633
