Varun Beverages' 25% Drop Overdone; Strong Portfolio, Distribution Can Weather Competition, Says Citi

Varun Beverages Ltd.'s stock has fallen by 25% this year amid increasing competition in the beverage market, especially from Reliance’s Campa brand. However, Citi on Tuesday said this decline is "overdone" and sees it as an attractive investment with a favorable risk-reward ratio.

The brokerage maintains a Buy rating on the stock with a target price of Rs 750, seeing strong growth potential driven by key factors like its solid portfolio, distribution network, and aggressive consumer promotions.

Campa, launched by Reliance in 2023, has gained around 10% market share in select states. Its aggressive pricing and marketing, such as securing the co-presenting rights for the IPL, have intensified competition.

However, Citi believes that Campa will mainly take market share from smaller local and regional brands, rather than challenging the dominance of larger players like PepsiCo and Varun Beverages.

Citi points out that Varun Beverages, with its extensive distribution of over 4 million outlets and strong brands like Mountain Dew and Sting, has significant competitive advantages. These, along with its high focus on general trade (90% of the market), will likely minimise the impact of Campa’s entry on its growth.

While competition could affect margins, Citi believes Varun Beverages has several levers to manage this challenge, including an improved product mix, benefits from lower crude prices, and support from PepsiCo. Additionally, a recent strategic investment in Hindustan Coca-Cola Beverages could help reduce the risk of a prolonged price war in the market.

The brokerage also hosted a call with Neeraj Garg, who shared key insights, including how increased competition in the sector typically accelerates overall market growth. He emphasised that the key to gaining market share is keeping the cost to serve low, which can be achieved through a well-distributed manufacturing setup and manufacturing efficiency.

Glass bottles, though less common in India now, could become more important due to their cost advantages, helping brands offer competitive prices. Additionally, new entrants may use lower pricing to attract consumers and grow the market, though this could increase competition.

Taking the discussion and Varun Beverages' strong growth potential, Citi continues to maintain a positive outlook on the stock, expecting strong earnings growth in the near term, driven by a hot summer season in India and acquisitions in Africa.

The shares of Varun Beverages rose as much as 3.45% to Rs 524.75 apiece on Tuesday. The stock pared gains to trade 2.90% higher at Rs 521.95 apiece, as of 11:10 a.m. This compares to a 1.11% advance in the NSE Nifty 50 Index.