Varun Beverages, the PepsiCo bottler, is set to see growth acceleration ahead, and we forecast 49% EPS CAGR led by recovery in volumes, new launches, distribution expansion, margin normalisation and reduction in interest cost. Balance sheet would continue to deleverage and RoE is set to expand to c.25% by CY23. With all ingredients in place, we see a case for multiple re-rating and highlight VBL as a high conviction Buy with revised Rs 1,200 TP (from Rs 930).
Covid disruption: VBL was among the companies in our coverage impacted the most by Covid-19 disruption during the peak season (Apr-May) in CY20 & CY21. While in-home consumption partly compensated, India (organic) volumes declined >20% in CY20.
Strong recovery now: With a pick-up in H1CY21 economic activity, VBL also staged a strong recovery with c.40% y-o-y growth, although 2-year CAGR still remains negative. With the opening up of economy and acceleration in the pace of vaccinations, outlook on VBL volumes remains strong for the next few quarters.
South share gain: VBL acquired the south & west territory from PepsiCo in May-19. Our industry interactions indicate PepsiCo lost market share in the territory in the preceding few years. VBL, post acquisition, was expected to focus on the execution (addi. visi coolers, increased retail presence), driving market share gains. However, restrictions during busy season impacted VBL plans on ramp-up; this should now change as VBL focuses on growth in CY22 driving share gains, in our view.
Distribution expansion: Distribution expansion was impacted by Covid-19 disruption in CY20 (& H1CY21). VBL added c.25k visi-coolers in CY20 and we expect this to accelerate to c.40k p.a. going ahead. Distribution expansion is an opportunity, especially in South & West, which contributes a third to the overall 800k coolers, in our estimate and we expect an acceleration in the acquired territory even while existing regions will also continue to see additions.
Beyond CSD: Among the new launches, energy drink brand Sting continues to ramp up well and has become the market leader. H1CY21 volumes are already in excess of full year, CY20 level and the brand already contributes c.5% to India volumes. The success is attributable to attractive product pricing (sharp discount to Red Bull), packaging format (PET) and distribution reach (around a third of overall). Momentum on Mountain Dew Ice continues, which also is margin accretive given 12% GST rate cf. 40% for CSD.
Strong EPS growth: VBL saw a 170bps Ebitda margin contraction in CY20 due to negative op. leverage but CY22 should go back to historic levels as volume growth picks up. Reduction in net debt coupled with rate reduction should further help and we forecast CY20-23 EPS CAGR at 49%. RoE should expand to c.25% by CY23, a 7-8ppt rise from CY21 levels.
High conviction BUY: We add VBL to a high-conviction Buy and raise PT to Rs 1,200 based on 42x Sep-23 P/E (from 35x earlier). Risks: another Covid related disruption, sharp rise in input costs, aggressive overseas M&A, among others.