Varun Beverages shares rise 4% on healthy Q2 profit; should you buy the stock?

Shares of Varun Beverages (VBL) rose over 4 percent on November 7 after the company reported a healthy set of September quarter results. Its net profit jumped nearly 30 percent to Rs 514.05 crore and revenue rose 21 percent to Rs 3,937.75 crore, with volume growth and higher realisation driving sales and low raw material prices aiding margin expansion.

Analysts are largely positive on the PepsiCo bottler as they believe that the company is doing exceeding well in the FMCG category, led by expanding the go-to-market, unlike peers, and penetration in rural areas.

Varun Beverages continues to maintain its growth momentum guidance for CY23, supported by its robust on-ground execution, expanding manufacturing capacities, and increasing distribution reach.

Outlook

Axis Securities expects Varun Beverages to continue its market-leading performance on account of Normalised operations along with market share gains in newly-acquired territories; Management’s continued focus on the efficient go-to-market execution in acquired and underpenetrated territories as reflected in its recently commissioned Bihar plant operations.

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Expansion in its distribution reach to 3.5 million outlets in CY23 from 3 million currently, and focus on expanding high-margin Sting energy drink across outlets coupled with increased focus on expansion of Value-Added Dairy, sports drink (Gatorade), and Juice segment, and Robust growth in the International geographies, led by focused execution, is also expected to boost Varun Beverages’ performance going forward.

Should you buy Varun Beverages shares?

“We expect VBL to maintain its earnings momentum, aided by: 1) increased penetration in newly acquired territories in South and West India, 2) higher acceptance of newly launched products, 3) continued expansion in capacity and distribution reach, 4) growing refrigeration in rural and semi-rural areas, and 5) a scale-up in international operations,” said Motilal Oswal as it reiterated its ‘buy’ rating on the stock with a target price of Rs 1,090.

Axis Securities also has a ‘buy’ recommendation on the stock. “We believe VBL is expected to continue its strong growth momentum,” it said, adding that an increase in competitive intensity, ram material inflation, and weakening of demand environment are among the key risks for the beverage maker.

According to analysts at Jefferies, Varun Veverags has demonstrated strong execution in the growing packaged beverages category, and it has an opportunity to expand distribution, gain share in the South & West and drive strong earnings per share (EPS) growth. “In our base case, we forecast a 17 percent annual growth in revenues over CY22-25E with 170bps margin expansion. We forecast EBITDA to rise at 21 percent CAGR,” it said.

An increase in distribution reach and cooling infrastructure in rural & newly acquired regions offer a multiyear growth headroom for VBL and should help expand Return on capital employed (RoCEs), the international brokerage said as it arrived at a fair value of Rs 1,100 per share.

For the Upside Scenario, VBL’s volume growth is expected to be robust on the back of strong growth in rural, as well as juices and dairy beverages. “This should drive strong RoCE and thereby premium valuation multiples,” it said, arriving at a fair value of Rs 1,250 per share.

Also Read | Varun Beverages Q3: Net profit rises 29.98% to Rs 514.05 crore, revenue up 21.22%

At 11:27 am, Varun Beverages shares were trading 4.16 percent higher at Rs 985.00 on the National Stock Exchange (NSE). So far this year, the stock has risen 47.78 percent, outperforming benchmark Nifty which has risen 6.5 percent during this period.

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