Varun Beverages shares likely to see over 10% upside, says analyst; here’s why

Following a visit by the brokerage to the Varun Beverages plant in Nuh, Gurgaon, the brokerage house stated in its report that it will essentially stick to its estimates for CY24–25 and reiterate ‘Accumulate’ with a higher target price of ₹1,180 from ₹1,065 as it assigns 48x (from 45x) CY25E P/E, given a roll-forward and 45% increase in capacity over CY22.

“We estimate Varun Beverages, to post an earnings per share compound annual growth rate (EPS CAGR) of 21.5% during CY23-25 which is highest amongst our coverage universe,” the brokerage said.

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The Varun Beverages Nuh plant in Gurgaon was founded in CY11, and PepsiCo named it the best plant in the food and beverage sector in CY16. The plant has three production lines: one for glass bottles, and two for PET bottles. There is room to grow to accommodate three more lines. 

The main markets that Varun Beverages serves are Delhi, Jammu & Kashmir, Rajasthan, Panipat in Haryana, and Punjab. About 25% of the plant’s volume is attributed to 250–300 ml stock keeping units (SKUs), with the remaining 40% of bottles being 400–1,000 ml. The plant produces bottles that are 1.0 litre and larger, according to the report. 

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Brokerage Elara Capital identified three important growth drivers after its visit. Let’s take a look at them. 

Innovative offering: Gatorade production in a CSD setup

Recent success at the Nuh plant has allowed it to produce Gatorade in a carbonated soft drink (CSD) setup, which frees up the CSD line for Gatorade (a non-CSD product). Many plants replicate this successful pilot project.

“PepsiCo aims to implement this approach in other geographical locations. For Gatorade, Varun Beverages will focus on premium outlets in urban markets (overall urban reach is 40% of distribution currently,” the brokerage said.

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Embracing agility: flexible production line helps in quick transition

While its other plants have reached a rate of 800 bottles per minute, this plant produces 600 bottles per minute. The plant has three hours to switch to a new product in case of unexpected demand for a particular one.

Promising outlook: aggressive foray into international markets

“We engaged with management to gain insight into the global markets. In Zimbabwe, VBL successfully has elevated Pepsi’s market share to 70% with 56mn cases (population of 15-20mn). In Morocco, the market share surged from the single digits to 28% over the past 3-4 years, driven by water, contributing 50% to total volume. In Congo, a market 2x the size of Zimbabwe, the company currently targets 60% of the population. Promising opportunities also lie in Mozambique and South Africa,” the brokerage said. 

At 12:53 IST on Tuesday’s session, Varun Beverages share price was trading 1.10% lower at ₹1,059.85 apiece on BSE.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions. 

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Updated: 05 Dec 2023, 01:11 PM IST