Varun Beverages turns to dairy, sports drinks, juices to power growth. What makes Motilal bullish?

Pepsi bottler Varun Beverages Limited (VBL) is shifting its focus to new performers such as value-added dairy, sports drinks, and juices segments to sustain its growth trajectory.

These untapped markets have the potential to become significant drivers of growth for the company in the long run, said domestic broking firm Motilal Oswal Financial Services in a July 10 report.

According to a recent report by IMARC Group, the flavored milk market in India is projected to see a compounded annual growth rate (CAGR) of 25 percent to Rs 15,860 crore between CY23 and CY28. VBL recognises the rising demand for dairy-based beverages, as health-conscious consumers are increasingly opting for these healthier alternatives over carbonated drinks.

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VBL’s foray into the value-added dairy segment, operating under the brand name ‘Cream Bell’, has also been well-received by consumers. As a result, the company plans to triple its capacity in this segment by CY23-end and aims to roll out its value-added dairy-based beverages nationwide by CY24.

To support this expansion, VBL is setting up two plants in Maharashtra and Uttar Pradesh, with a third unit scheduled for construction in Orissa in the near future, Motilal Oswal said, analysing the company’s annual report.

The value-added dairy-based beverages segment offers higher returns for VBL, primarily due to the sale of single-serve products that yield higher profit margins compared to larger bottles, the broking firm said.

The dairy segment benefits from a favourable tax structure, with a Goods and Services Tax (GST) rate of 12 percent, as opposed to the 40 percent levy imposed on carbonated soft drinks (CSD).

VBL is also making its mark in the sports drinks market through its product Gatorade. The Indian sports and energy drinks market is expected to record a CAGR of 14 percent until CY28, reaching a value of $5.8 billion. Additionally, Motilal Oswal said that VBL has established a strong presence in the fruit-based juice segment under the popular brand Tropicana.

VBL remains confident that its energy drink Sting will continue to enjoy robust growth. Plans are underway to expand its presence by reaching more outlets in the future.

Motilal Oswal expects a revenue/EBITDA/PAT CAGR of 17/19/26 percent till CY25. It has a ‘buy’ rating on the stock with a target price of Rs 940.

At 11am, the stock was quoting at Rs 822 on the NSE, over 1.2 percent higher from previous close. The stock has almost doubled investors’ wealth in the past one year.

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