Varun Beverages Q2 Review: Target Price Tug-Of-War — Why Goldman Sachs Raises, CLSA Lowers
Goldman Sachs raised target price while CLSA reduced. However, both the brokerages retained positive rating.
Analysts maintained their positive view on Varun Beverages Ltd., as they believed the company has a strong potential for good growth. Goldman Sachs raised the target price, while CLSA reduced the target price.
Despite a decline in volume growth in the India business, Varun Beverages was able to maintain profit margin due to operational efficiencies, according to Goldman Sachs. A short summer weighed on demands.
Varun Beverages' India business saw a 7% year-on-year decline in volume as the southwest monsoon started early in India. A similar situation was seen at other summer beverage-producing companies as well, according to Goldman Sachs.
The company has also carried out cost-efficiency initiatives like reducing freight charges by consolidating distributors and commissioning larger plants closer to markets. They also rationalised the sales structure. Now, it aims to further reduce operational costs by investing more in renewable energy and increasing efficiency in new productions, Goldman Sachs said.
In the second half of the calendar year, Varun Beverages will see volume recovery of 10% year-on-year, according to the brokerage.
Goldman Sachs raised the target price to Rs 610 from Rs 590. The target price implied a 19% upside from Tuesday's close. The brokerage maintained the buy rating.
Q2 Earnings Key Highlights (Consolidated, YoY)
Revenue down 2.5% to Rs 7,017 crore from Rs 7,197 crore (Bloomberg estimate: Rs 7,358.9 crore)
Ebitda rose 0.4% at Rs 1,999 crore from Rs 1,991 crore (Bloomberg estimate: Rs 1,893.3 crore)
Margin rose 110 bps to 28.8% from 27.7% (Bloomberg estimate: 25.7%)
Net profit up 5.1% at Rs 1,317 crore from Rs 1,253 crore (Bloomberg estimate: Rs 1,216.3 crore)
In the India segment, Varun Beverage is expecting capex intensity to reduce to Rs 600 crore from Rs 700 crore. The company has appointed Pankaj Madan, a new chief financial officer who has experience in Interglobe Enterprise and Bharti Walmart, CLSA said.
In the international business, backward integration for Zambia, DRC, and Morocco was a key driver of Ebitda margin expansion of 280 basis points on the year, CLSA said in a note.
CLSA maintained a high-conviction outperform rating on Varun Beverages, while it reduced the target price to Rs 774 from Rs 786 apiece, which implied a 51% upside from Tuesday's close price.
Distribution of snacking products has started in Zambia and Zimbabwe. A plant will be commissioned in Zimbabwe by October. The management has guided margin expansion in South Africa, Goldman Sachs said.
