Strong season, new markets to drive gains for Varun Beverages' stock

Operating leverage, product mix to offset raw material pressures, say brokerages

Multinational giant PepsiCo’s strong June quarter earnings commentary is positive for its India franchise -- Varun Beverages Limited (VBL). The global food, beverages and snack giant indicated that its developing and emerging market sales were resilient, delivering a double digit organic revenue growth across multiple countries, including India.

After a 26 per cent revenue growth in the last quarter, the company is expected to put up a strong show for the second consecutive quarter. Analysts, led by Anand Shah of Axis Securities, estimate the company’s June quarter (peak season) revenue growth to come in at 86 per cent year-on-year (YoY). This is on the back of a 93 per cent growth in India volumes and 46 per cent uptick in the international segment.

Overall, volumes are likely to grow by 85 per cent YoY to 282 million cases on the back of strong summer season, robust scale-up in new products and market share gains in south and west territories. Strong top line performance will also lead to a doubling of operating profit to Rs 1,143 crore.

While consumer companies are struggling with demand and margin pressures, VBL’s performance stands out. Even as the staple (consumer) companies would register an aggregate annual revenue growth of 10 per cent over the past three years, VBL has the highest growth on that front at 18 per cent. Its operating profit growth over the three-year period too is the second best at 13 per cent as compared to the average for staple companies at 8 per cent, highlights Axis Securities.
 

While there would be input cost pressures in the near term, better product mix and operating leverage are expected to ensure healthy margins, believes B&K Securities. Moreover, given VBL’s improvement in performance trajectory, it could well be that Pepsi is gaining market share over Coca Cola – which is a structural re-rating trigger for the company in terms of multiples going forward, says the brokerage.

A medium-term positive are the steps it has taken to de-risk the seasonality and portfolio risk. The company acquired the south and west India region in calendar year 2019 (CY19). Given the strong volume growth (45 per cent) and low market share of the company in the acquired territories, this offers a huge opportunity.

The other segment which should be beneficial is its presence in the international market which accounts for 19 per cent of total volumes and has higher realisations than the India market. The international business posted an annual volume growth of 24 per cent over CY15-21 as compared to 14 per cent growth in India, according to Anant Chaudhary of Bonanza Institutional Research

Incremental gains for the beverage maker are also expected to come from new launches. In February, the company signed a co-packing agreement to make Kurkure Puffcorn for the PepsiCo’s India unit which marked its entry into the manufacturing of products other than beverages. In addition to growth in energy drink Sting, value added dairy products (mango shake, cold coffee) and Tropicana range, tapping into other PepsiCo food products for manufacturing and distribution would drive growth going ahead.

While there are multiple positives in the near term and the financial performance over the CY21-23 period is expected to remain strong, the 17 per cent uptick in the stock over the past month – from Rs 747.9 apiece to Rs 874.75 -- captures some of these gains. Investors could consider the stock for the long term on dips.