BevCo's acquisition to aid Varun Beverages' market share, EPS: Analysts

Shares of Varun Beverages hit a new peak of Rs 1,380.45 as they surged 18 per cent in Wednesday's intraday trade. With an m-cap of Rs 1.63 trillion, VBL stands at 40th position in m-cap ranking

Varun Beverages’ (VBL) complete acquisition of South Africa-based the Beverage Company (BevCo) is set to boost its market share, besides spurring earnings per share (EPS) over the next few years, according to analysts.

Raising the company’s target price to Rs 1,250 (from Rs 1,025), analysts at Kotak Institutional Equities said the acquisition will lead to a significant value creation opportunity for VBL. It will give a fillip to PepsiCo’s low single-digit share in South Africa.

“South Africa is the largest soft drinks market in Africa, with an industry size of nearly 1.18 billion cases (about 50 per cent of India). It has grown at 3.1 per cent during 2017-22. BevCo’s own brands/PepsiCo brands have 17 per cent/3 per cent share in local and global brands. This, along with VBL’s execution track record in India and Africa, present a significant value creation opportunity,” they said in their report.

On Tuesday, VBL said it has approved the acquisition of 100 per cent stake in PepsiCo’s South African bottler, BevCo, for a cash consideration of Rs 1,320 crore (0.83X enterprise value (EV)/sales, 6.9X EV/earnings before interest, taxes, depreciation and amortisation (Ebitda)).

BevCo registered revenues of Rs 1,600 crore and Ebitda of Rs 190 crore (12 per cent Ebitda margin) in FY23 (June 2023). It has franchise rights for PepsiCo brands in South Africa, Lesotho, and Eswatini, and distribution rights for Namibia and Botswana.

The management expects this deal to be concluded by July 2024 (or earlier), subject to regulatory approvals.

Analysts at Motilal Oswal Financial Services expect BevCo to generate a minimum Ebitda of Rs 220 crore in FY24 (around 5 per cent of VBL’s CY24 Ebitda).

Assuming the historical revenue growth rate of 13 per cent to continue, BevCo is estimated to clock a revenue of Rs 1,800 crore in FY24 (10 per cent of VBL CY24 revenues). This translates to an Ebitda margin of 12 per cent.

“The acquisition of BevCo is EPS-accretive for VBL and represents an attractive valuation. Further, this acquisition will improve the company’s presence in the African sub-continent,” the brokerage said. It has a 'buy' rating and a target price of Rs 1,285 for VBL.
 

The South African soft drink market is expected to reach 1,537 million cases by CY27, a 5.3 per cent compound annual growth rate (CAGR) over CY22-27.
 

VBL’s focus will be on product portfolio innovation with favourable demographics, coupled with the thrust on the go-to market strategy to drive lateral growth across segments, they added.
 

On the bourses, shares of Varun Beverages hit a new peak of Rs 1,380.45 as they surged 18 per cent on the BSE during Wednesday’s intraday trade. They settled 7 per cent higher at Rs 1,254.5 against 1.3 per cent fall in the benchmark Sensex.
 

The stock price of Varun Beverages has zoomed 42 per cent in eight weeks, propelling the company into the list of top 40 most-valuable listed companies in terms of market capitalisation (m-cap).

Currently, with an m-cap of Rs 1.63 trillion, Varun Beverages stands 40th in the overall m-cap ranking list and is ahead of Tata Steel, BSE data shows.
 

“VBL is well placed to deliver a 20 per cent/22 per cent/23 per cent/24 per cent CAGR in volumes/revenue/Ebitda/profit after tax (PAT) over CY2023-26E. Overseas contribution to VBL’s volume/Ebitda should increase to 29 per cent/24 per cent by CY2025E (20 per cent/18 per cent in CY2023E),” they said.