Volume outlook remains strong for Varun Beverages after stellar Q3 results

Led by robust volume growth, Varun Beverages posted a better-than-estimated performance in the 2023-24 October-December quarter. As one of PepsiCo’s largest franchisees globally, the company achieved a 20 per cent year-on-year (Y-o-Y) revenue growth, with volumes accounting for about 17 per cent, and the remaining being realisation gains.

A strong third-quarter performance led to a 3.5 per cent rise in the stock price in Tuesday’s trade, reaching Rs 1,347.45 per share.

The Indian market led on the volume front, experiencing a growth of 19 per cent, while international markets posted a 16 per cent growth. Realisation growth was driven by a better product mix in the country and higher realisations in overseas markets.

Profitability also remained strong, with gross margin expansion of 35 basis points (bps) over the year-ago quarter. On a sequential basis, the improvement was 130 bps. The gains, exceeding Street estimates, were primarily led by the softening of polyethylene terephthalate chip (bottling) prices.

The operational performance was robust, with operating profit ending 36 per cent higher, driven by operating leverage, and margin expansion coming in at 180 bps Y-o-Y, reaching 15.7 per cent. While interest expense rose sharply by 55 per cent Y-o-Y due to increased debt, net profit rose by 76 per cent, surpassing estimates at Rs 130 crore.

Motilal Oswal Research, despite increasing its 2024-25 earnings estimates, highlights that higher interest costs, driven by an increase in debt (capital expenditure and acquisition-led increase), partially offset the increase in earnings.

Emkay Research points out that India has seen a strong recovery with high-teen growth in the second half, following a muted summer due to unseasonal rains. The beverage category is outperforming other fast-moving consumer categories due to underpenetration, improved road/electricity infrastructure, and the scale-up of the energy-drink category, says the brokerage.

Devanshu Bansal and Vishal Panjwani of the brokerage have upgraded the stock to ‘add’ from ‘reduce’ and have increased the target price by 20 per cent to Rs 1,400.

This is driven by a 4 per cent rise in earnings per share and a 10 per cent increase in the multiple to 50 times, based on strong visibility and outperformance versus peers. Additionally, the upgrade is attributed to the 5 per cent incremental value addition from the South Africa acquisition.

Kotak Research believes that distribution expansion, with an addition of 450,000 outlets Y-o-Y to 3.5 million units, and the continued stellar performance of Sting, which reported a 75 per cent volume growth in calendar year 2023 (CY23), helped the company defy the consumption slowdown in India.

Analysts led by Jaykumar Doshi project a 22.5 per cent annual volume growth estimate over CY23 through calendar year 2026 (CY26). This would be driven by a 37 per cent volume growth in the high-growth portfolio (Sting + Gatorade + Rockstar + Tropicana + dairy) to about 30 per cent of India volumes from 18 per cent currently.

In addition to this, the analysts expect a 12 per cent volume growth in the core portfolio (carbonated soft drinks) in India and a 40 per cent volume uptick in the international portfolio, supported by the South Africa acquisition and organic expansion in the Democratic Republic of the Congo. They estimate a 27 per cent earnings growth over CY23-26 and have increased their target price to Rs 1,400 while retaining an ‘add’ rating.