Soaring mercury to aid Varun Beverages volumes this year
Investors in Varun Beverages Ltd (VBL) shares are sitting on handsome returns. Since the beginning of CY22, the stock has more than doubled. VBL is one of the largest franchisees of PepsiCo globally outside of the US. It follows the January to December financial year.
Strong volume growth in CY22 and better operating leverage are among factors that boosted sentiments for the stock. Recall that peak season sales were impacted in the previous two years owing to the pandemic-induced disruptions. Robust demand recovery and distribution expansion helped VBL clock 41% year-on-year (y-o-y) volume growth in CY22. Plus, VBL’s energy drink, Sting, which has a higher net realization put up a robust show, beating expectations. Sting accounted for about a tenth of total sales volume in India in CY22. Overall, Ebitda margin expanded by 240 basis points y-o-y. On the flip side, net debt rose to ₹3,409 crore as on 31 December 2022 from ₹3,005 crore a year ago due to growth capex.
View Full Image
As such, the early onset of summer and the forecast of a hot summer is expected to support VBL’s volume performance in CY23. “The company is prepared to capitalize on the opportunity, led by (1) capacity addition (about 30% increase in carbonated soft drinks (CSD) capacity in India by end-March 2023) and (2) adequate stocks for the peak season, thanks to early ramp-up to peak utilization (pre-stocking of finished goods starting in December 2022 for summer 2023),” said analysts at Kotak Institutional Equities. Sting is expected to be a key growth driver this year.
But investors need to be watchful of any threat owing to the relaunch of Campa Cola by Reliance Industries. A meaningful impact is not expected in the near-term. After analysing the potential risk to VBL due to the relaunch, analysts from ICICI Securities said they are not modelling any material risk to VBL in the near-term but will closely monitor the progress of Campa beverages. Among other factors, they point out that Campa needs to invest in multiple manufacturing units across India (as beverages are ‘low value high volume’ products), distribution network and visicoolers. “These investments may require multiple years,” said the ICICI Securities’ analysts.That said, how realizations pan out remains to be seen. “Realization may come under strain due to additional discount and rebate extended to counter market share loss to Campa Cola,” said a report by Antique Stock Broking on 20 March. The broking firm expects the early onset of summer to be positive for the industry.
To be sure, the sharp run up in VBL shares could limit meaningful upsides hereon.
Know your inner investor
Do you have the nerves of steel or do you get insomniac over your investments? Let’s define your investment approach.
Download The Mint News App to get Daily Market Updates.
