Varun Beverages Ltd.'s June-quarter earnings prompted Citi to cut its target price after operating profit and margins missed Street expectations, although Jefferies and Morgan Stanley retained their bullish stance, saying the recent correction already reflects concerns over slowing India growth.
Brokerages said weaker-than-expected April weather weighed on domestic volumes early in the quarter, but demand recovered in May and June, while the international business continued to cushion the impact. Analysts also pointed to encouraging demand trends in July and expect double-digit growth momentum to continue over the medium term.
The company reported double-digit growth in revenue, operating profit and net profit during the quarter, although EBITDA margin contracted from a year earlier and came in below analyst estimates.
Varun Beverages Q2 Highlights (Consolidated, YoY)
- Revenue (ex-excise) rose 20.4% to Rs. 8,451 crore. (Bloomberg Estimate: Rs. 8,231 crore)
- EBITDA increased 17.2% to Rs. 2,343 crore from Rs. 1,999 crore. (Bloomberg Estimate: Rs. 2,430 crore)
- EBITDA margin stood at 27.7% versus 28.5% a year ago. (Bloomberg Estimate: 29.5%)
- Net profit rose 15.5% to Rs. 1,521 crore from Rs. 1,317 crore. (Bloomberg Estimate: Rs. 1,440 crore)
- Consolidated sales volume increased 19.8% year on year.
The company beat Street estimates on revenue and net profit but missed expectations on EBITDA and operating margin, reflecting higher operating costs despite healthy volume growth. Analysts said the international business remained a key support during the quarter, offsetting softer domestic demand caused by unfavourable weather in April.
Brokerages expect demand to improve in the second half of the year as weather normalises, with international markets and sustained category growth continuing to support earnings.
Here's what brokerages are saying after Varun Beveragesa announced Q2 Results
Jefferies
Maintained 'Buy'; Target Price At Rs. 615
Recent correction appears excessive.
Weak April weather affected domestic volumes, while May and June remained strong.
International business cushioned softness in India.
July demand trends remain encouraging.
Continues to see attractive long-term earnings growth.
Citi
Maintained 'Buy'; Target Price Cut To Rs. 580 From Rs. 640
June-quarter earnings were below expectations.
Debate around India growth persists.
International business continues to perform strongly.
Long-term category outlook remains attractive despite near-term moderation.
Morgan Stanley
Maintained 'Overweight'; Target Price At Rs. 557
Management commentary on July demand remained positive.
Expects double-digit growth momentum to continue.
Believes the recent correction already reflects concerns over slower India growth.
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