Morgan Stanley has maintained its overweight rating on Varun Beverages and kept its target price at Rs 557 after the company announced plans to set up a wholly owned subsidiary for ready-to-drink products and alcoholic beverages.
The brokerage said the move was in line with management's earlier commentary on opportunities to expand into ready-to-drink and alcoholic beverages. It said it would "await clarity and details on the company's plans" for the new business.
The announcement marks a step in Varun Beverages' planned diversification beyond its existing beverage portfolio. The company's board has approved the incorporation of KIVA Spirits and Company Limited in India to undertake the ready-to-drink, alcoholic beverages and allied products business, subject to regulatory approvals.
The proposed subsidiary will be wholly owned by Varun Beverages. It will have a proposed authorised share capital of Rs 10 crore and proposed paid-up equity share capital of Rs 9 crore, according to the company's exchange filing.
Varun Beverages has also appointed Prathmesh Mishra as CEO and managing director of the proposed subsidiary. Mishra most recently served as managing director for Korea and Japan at Diageo and previously held senior roles at Diageo India and Pernod Ricard India, the company said.
Separately, the board approved the incorporation of a joint venture company in Tunisia for the production and distribution of beverages, including carbonated soft drinks, juices, water and dairy products. Varun Beverages will hold a 75% stake in the venture, while Bevanda, a Tunisia-based company, will hold the remaining 25%.
Morgan Stanley's note said its residual income model reflects a probability-weighted 25% bull case, 60% base case and 15% bear case, with its assumptions including 10.84% cost of equity, 7% risk-free rate and 6% equity risk premium.
The brokerage identified stronger-than-expected growth in India, higher-than-expected gains in the company's share versus PepsiCo's beverage bottling business in India and faster progress in new African markets as potential upside factors. It cited slower growth amid rising competition, changing consumer behaviour, regulatory changes and currency and macroeconomic volatility in international operations as risks.
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