Varun Beverages' Snacks Deal With PepsiCo Precursor For 'Something Big': Jefferies
Shares of Varun Beverages Ltd. gained after the company extended its partnership with PepsiCo India Holdings Pvt. to make snacks.
"The board of directors in a virtual meeting held on Feb. 28 approved the proposal to enter into an agreement to manufacture 'Kurkure Puffcorn' for PepsiCo India as a part of their network of co-packers," Varun Beverages—the largest bottler of PepsiCo in the world outside of the U.S.—said in an exchange filing.
According to Jefferies, this is a small brand for PepsiCo, which counts Lays and Kurkure as its key brands offering chips and extruded snacks in India. "Given the size of the investment and Varun Beverages' role of a co-packer, this move is unlikely to have any meaningful impact on its P&L and balance sheet."
As much as the step is small, the research house, in a March 1 note, said this may be a "precursor to something bigger, although it is difficult to visualise its form, at this stage". "Varun Beverages' existing distribution network for beverages has a fair amount of overlap with the snacks business, at the point of sale. There is also a fair amount of logistics network overlap which may drive scale benefits for Varun Beverages, in case a broader partnership materialises."
Jefferies has retained "high-conviction buy" rating on the stock.
Shares of the beverage maker jumped more than 7.3% intraday to near record high of Rs 1,016 apiece. The stock closed with 3.21% gains.
The stock's trading volume was over 3.5 times the 30-day average at this time of the day. Of the 17 analysts tracking the company, 16 suggest a 'buy' and one recommends a 'hold', according to Bloomberg data. The 12-month consensus price target implies an upside of 8.9%.
The scrip has risen more than 9.5% in 2022 so far compared with a 5% decline in the S&P BSE Sensex.
Other Highlights From Jefferies Note
Reiterates 'buy' with a target price at Rs 1,215 apiece—an implied return of 28.5%.
This is Varun Beverages' first extension into a non-beverage category. It is known to enjoy a strong relationship with PepsiCo.
Varun Beverages aims to spend around $3 million to manufacture and pack one of the snacking brands, Kurkure Puffcorn, at Kosi in Uttar Pradesh, where there is already a beverage line.
Varun Beverages remains the top pick in the FMCG sector.
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