Varun Beverages - Volume Growth Is Expected To Continue Across Segments: DRChoksey

DRChoksey Research Report

Varun Beverages Ltd. has continued to report strong volumes backed by an increasing distribution network and improving rural penetration in India along with strong growth in international business. Volume growth is expected to continue across segments due to big headroom for distribution expansion, strong capacity expansion undertaken in CY23 and CY24E and focus on incremental growth from smaller categories of juices, value-added dairy and Gatorade.

The addition of BevCo will accomplish Varun Beverages’ stated goal of entering new territories for incremental growth and reducing seasonality. BevCo margins are lower versus Varun Beverages’ current margins but there is scope for improvement due to operating efficiencies and proximity benefits from Varun Beverages’ operations in countries like Zambia and Zimbabwe.

We continue to like Varun Beverages as it has significant growth potential in India as well as international markets led by distribution expansion, capacity expansion, entry into new territories and products, and a strong financial position.

We have retained our estimates for CY24E-CY25E. We expect net revenue/ Ebitda/ adjusted profit after tax to grow at compound annual growth rate of 24.8%/ 26.0%/ 29.8%, respectively over CY23-CY25E.

We expect annual Ebitda margins to inch up over CY23-CY25E due to higher volumes, improving realisations and operating efficiencies offsetting the lower BevCo margins.

Varun Beverages is currently trading at 69.7 times/ 53.8 times its CY24E/ CY25E adjusted EPS.

We assign a price/earning multiple of 65.0 times to CY25E EPS of Rs 26.6 and assign a target price of Rs 1,732 per share (unchanged), with a 20.8% upside from current levels. Accordingly, we maintain a Buy rating in the shares of Varun Beverages.

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