Varun Beverages rallies 5%, hits record high on strong earnings hope

Shares of Varun Beverages (VBL) hit a record high of Rs 805.45, soaring 5 per cent on the BSE in Wednesday's intra-day trade.  In comparison, the S&P BSE Sensex was down 0.15 per cent at 52,613 points at 09:22 AM.

The stock has surged 8 per cent in the past two days, in an otherwise a weak market, on expectations of strong earnings.

Moreover, in the past three months, VBL has outperformed the market by surging nearly 35 per cent, as compared to 7 per cent decline in the benchmark index. VBL went ex-bonus on June 6th, in the ratio of 1:2, increasing its equity shares to 649.5 million post issue.

For January-March quarter (Q1CY22), VBL posted robust 26.2 per cent year-on-year (YoY) sales growth, supported by strong 19 per cent YoY volume growth across geographies, and 6 per cent YoY higher realization. Volume growth was led by the early onset of summer in India, translating into higher demand.

Despite increase in input costs, earnings before interest, taxes, depreciation, and amortization (ebitda) margin improved by 175 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 (PAT) nearly doubled or advanced 98.2 per cent YoY to Rs 271 crore from Rs 137 crore driven by improvement in margins, reduction in finance cost and higher profitability from our international operations.

The company is also seeing a solid uptick in consumer demand. With this, the management remains confident of delivering healthy volume growth in the medium to longer term.

"VBL is expected to benefit from a strong recovery going forward, led by growing out-of-home consumption, with the opening up of offices and traveling, uptick in volumes in new territories, traction in new products Sting, Value Added Dairy and Tropicana," according Motilal Oswal Financial Services.

VBL has signed a co-packing agreement to manufacture ‘Kurkure Puffcorn’ for PepsiCo India in February 2022. This is the first time that it has ventured into the manufacture of non-Beverages. In the long-term, the company may acquire additional manufacturing and distribution rights of other food products of PepsiCo, the brokerage firm said. It estimates revenue/EBITDA/PAT CAGR of 16 per cent/21 per cent/38 per cent over CY21-23.

Meanwhile, on May 26, 2022, CRISIL Ratings had upgraded its rating on the long-term bank facilities of VBL to 'CRISIL AA+' from 'CRISIL AA' and revised the outlook to 'Stable' from 'Positive'.

"Driven by strong cash accrual and accelerated debt repayment during the peak season, the group's debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio is expected to reach below 1.2 times by June 2022 and is expected to remain below 1.5 times even after factoring in moderate debt-funded capital expenditure (capex) over the medium term. However, any higher-than-estimated debt-funded acquisition or capex would be a key rating sensitivity factor," the rating agency had said in a detailed rationale. CLICK HERE FOR MORE DETAILS