Varun Beverages Q1 results: Should you buy this PepsiCo bottler stock?

The company on Tuesday said its consolidated profit after tax for the three months ended March 31, 2023, increased by 69 per cent year over year (YoY) to ₹429 crore.

In the same quarter, the company’s revenue from operations surged 38 per cent YoY to ₹3,952.5 crore from ₹2,867.4 crore in March 2022.

In a filing with the exchange, the company stated that robust demand throughout India’s regions was the primary factor in the sales volume increasing by 24.7 per cent to ₹22.4 crore cases in Q1 calendar year 2023 from 17.97 crore cases in Q1 calendar year 2022. Domestic volumes rose by 28 per cent.

The stock, however, ended 1.86 per cent lower at ₹1,417 on Tuesday.

Read more: Varun Beverages Q1CY23 Results: Net profit up 69%; stock split declared

Varun Beverages (VBL) produces, bottles and distributes carbonated soft drinks and non-carbonated beverages for PepsiCo.

As per Indian Beverage Association, VBL is the second largest franchisee in the world (outside the US) of carbonated soft drinks and non-carbonated beverages sold under trademarks owned by PepsiCo.

It follows the January-December financial year model.

Brokerages upbeat

Most brokerage firms are positive about the prospects of Varun Beverages‘ stock as they believe strong capex (capital expenditure), strong market presence and healthy demand outlook will augur well for the stock.

Brokerage firm Motilal Oswal Financial Services has maintained a buy call on the stock with a target price of ₹1,690.

Motilal cheered VBL’s strong revenue growth of 38 per cent YoY in the first quarter of the calendar year 2023 (Q1CY23), which as the brokerage firm highlighted, was led by robust growth in volumes (up 24.7 per cent YoY) with realisation touching ₹174 per unit (up about 11 per cent YoY).

The brokerage firm highlighted that savings in raw material prices and an improved product mix led to a YoY improvement of 90bp in gross margins. Gross margin/unit case grew 12 per cent YoY to ₹91.1, while EBITDA/unit case improved 21 per cent YoY to ₹35.6, supported by favourable operating leverage.

“We expect revenue, EBITDA and PAT CAGR of 20 per cent, 23 per cent and 31 per cent, respectively, over CY22-24. Factoring in Q1CY23 performance, we raise our CY23 and CY24 earnings estimates by 6 per cent and 3 per cent, respectively, on the back of better-than-expected realisation and margins,” said Motilal Oswal.

“We expect VBL to maintain its earnings momentum, underpinned by: (1) increased penetration in newly acquired territories of South and West India, (2) higher acceptance of newly launched products, (3) constantly adding new capacities and expanding distribution reach, and (4) growing refrigeration in rural and semi-rural areas,” Motilal Oswal said.

Brokerage firm Kotak Institutional Equities, too, has a buy call on the stock. The brokerage firm has raised CY2023-25 volumes/revenues by 1-3 per cent, moderated the EBITDA margin by 20-50 bps and maintained EPS. It has also revised the fair value (target price) to ₹1,590 from ₹1,500, modelling 40 times June 2025E price-to-earnings ratio.

Highlighting the management commentary, Kotak said VBL witnessed strong demand across regions in Q1CY23 in India, with rural markets slightly outperforming urban at present. Besides, the management toned down weather-related risks by stating that it can only impact growth by a couple of percentage points.

Kotak added that VBL retained its capex guidance for CY2023 at ₹1500 crore (cash outgo), of which a major portion is already spent. VBL expects net debt to reduce in Q2CY23, in line with the usual seasonality, but the year-end target is not concrete yet.

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Emkay Global Financial Services has also maintained a buy call on the stock with a target price of ₹1,700 as it underscored the company’s Q1 EBITDA was 10-15 per cent ahead of Street and the brokerage’s estimates, led by strong traction in India operations and better mix.

“While traction in star performer Sting continues, VBL is committing capital to future growth drivers (value-added dairy, juice and sports drink). With improved affordability, VBL remains confident about the demand for new products and plans to improve supply by leveraging its two new manufacturing capacities in CY24 and its existing distribution/visi-cooler network,” Emkay said.

“The Q1 beat led to a 1-2 per cent increase in our EPS estimate, but we see scope for a higher 5-7 per cent increase in Street estimates. Sting has seen huge success, with a nearly 500bps incremental contribution to CY19-22 CAGR of about 23 per cent, in our view. Similar traction in the new products can surprise positively,” said Emkay.

Disclaimer: The views and recommendations given in this article are those of the brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.