Varun Beverages hits new high on strong earnings hope; rises 16% in a month

The management remains confident of delivering healthy volume growth in the medium to long-term on the back of strong demand momentum.

Shares of Varun Beverages (VBL) hit a new high of Rs 870, up 2 per cent on the BSE in Wednesday’s trade in an otherwise subdued market, on expectation of strong earnings.

In the past one month, the stock rallied 16 per cent, as compared to 2 per cent rise in the S&P BSE Sensex. It has surged 44 per cent in six months as against 12 per cent decline in the benchmark index. Meanwhile, the stock zoomed 65 per cent in a year as compared to 2.2 per cent gain in the Sensex. In past two consecutive years, VBL has issued bonus shares in the ratio of 1:2 i.e one bonus share for every two shares held in the company.

VBL is a key player in beverage industry and one of the largest franchisee of PepsiCo in the world (outside USA). The company produces and distributes a wide range of carbonated soft drinks (CSDs) as well as large selection of non-carbonated beverages (NCBs), including packaged drinking water sold under the trademark of PepsiCo.

VBL has started the year on a strong note, delivering notable growth across all parameters for the first quarter ended March 2022 (Q1CY22). Robust demand is seen in both domestic and international markets, supported by early onset of summer in India, which has translated into healthy volumes of 18.7 per cent during the quarter. The improved net realizations have resulted in a solid net revenue growth of 26.2 per cent in Q12022. VBL follows January to December financial year.

Despite increase in input costs, earnings before interest, taxes, depreciation, and amortization (EBITDA) margin improved by 175 basis points (bps) to 18.8 per cent in Q1CY22, led by higher realization and operating leverage from increased sales volume. The company's profit after tax nearly doubled or advanced 98.2 per cent YoY to Rs 271 crore from Rs 137 crore.

On the demand front, the management is seeing a solid uptick in consumption as summer season in the domestic market is off to a good start. The management also remains confident of delivering healthy volume growth in medium to long-term.

That said, analysts expect the company to report overall revenue growth above 25 per cent in 2022, as the group is likely to benefit from early onset of intense summer and waning impact of the pandemic.

“The group’s performance in 2022 (January to December) is likely to benefit from favourable peak summer season, full potential of the territories acquired in 2019 and enhanced capacities at the plants in Bihar and Sandila in Uttar Pradesh, which became operational in March 2022. However, the company's revenue was impacted in the peak summers of 2020 and 2021 amid the Covid-19 pandemic,” Crisil said in rating rationale.

Analysts expect the group's debt-to-ebitda ratio to dilute below 1.2 times by June 2022, driven by strong cash accrual and accelerated debt repayment during the peak season. However, they believe that any higher-than-estimated debt-funded acquisition or capex would be a key rating sensitivity factor.