Volume recovery to support Varun Beverages, stock outperforms

Bunching up of festive season in Q4CY20, resumption of public transport aiding on-the-go consumption, continuing in-home consumption trend bode well for the firm going forward

Shares of Varun Beverages (VBL), which bottles and distributes PepsiCo’s range of beverages in India had rallied close to 19 per cent to hit an all-time intraday high of Rs 924 on Friday. Though it gave up some of the gains on Monday’s session, analysts forecast robust growth in the quarters ahead backed by increased volumes.  

The company reported better-than-expected volumes in the last quarter, aided in part by the opening of hotels and restaurants from September. While volumes were down 4 per cent during Q2, the management highlighted that they were 13 per cent higher in the month of September and are confident that the trend will hold in coming months. 

Sales from hotels and restaurants account for roughly 15 per cent of total revenue for the company according to analyst estimates. “Further, with bunching up of festive season in Q4CY20, resumption of public transport aiding on-the-go consumption and continuing in-home consumption trend both in rural, semi-urban (60 per cent of Q3CY20 sales) and urban areas bode well for VBL going forward,” said brokerage firm Axis Securities in a recent report. 

With a significant loss of volumes during the peak season of March to June, the company had to direct its focus on increasing ‘at-home’ consumption. As part of its strategy, it launched a cheaper variant of Pepsi (1.25 litre Pepsi bottle for Rs 50) targeting this category. This in turn paid rich dividends as it reported a 25 per cent y-o-y growth in this category during the previous quarter. And analysts expect this trend to sustain as consumers prefer spending time indoors. 

Recent acquisitions are also seen supporting volume recovery. “Stronger recovery would result from VBL's effort in extending the distribution network in acquired territories in South/West and driving utilisation levels.” said Antique Broking in a recent report. “We believe VBL's volume could deliver 10 per cent annual growth. While revenues and operating profit are expected to go up 11-14 per cent, the bottomline should rise 30 per cent over CY19-22E,” it added. 

However, a sharp spike in coronavirus cases and concerns over another round of lockdowns could hurt the recovery next year. Shares of Varun beverages are up nearly 33 per cent over the last six months this year as compared to 7 per cent gain registered by the Nifty FMCG index during the same period. Most analysts have a buy rating on the stock.