Varun Beverages part of trillion-rupee club; growth strong across regions

Since its results, the stock of bottling and beverage distribution company Varun Beverages (VBL) is up 7 per cent on the back of a strong 2022-23 January-March quarter performance, robust outlook, and revision in profit estimates.

Given the sharp uptick, it is now part of the trillion-rupee club, with its market capitalisation at Rs 1.01 trillion.

The stock is one of the best performers in the consumer space as well as the S&P BSE 200, of which it is a constituent.

It has logged gains of 120 per cent over the past year, with 42 per cent contribution coming in six months.

Even as its consumer peers are struggling on volume and revenue growth, VBL outperformed its peers by a wide margin.

Sales in the quarter surged 37.7 per cent year-on-year (YoY) to Rs 3,893 crore.

Growth was largely driven by a volume uptick of 24.7 per cent.

Notwithstanding unseasonal rainfall, volume growth in the Indian market came in at a robust 28 per cent (four-year annual growth of 27 per cent) and was aided by distribution expansion and ramp-up in energy drink, Sting.

The company’s distribution footprint across markets is over 3.3 million outlets.

The company indicated that growth was strong across all regions and rural outperformed the urban segment.

Analysts of IIFL Securities, led by Percy Panthaki, highlight that volume growth of 28 per cent in India makes VBL a clear outlier in an otherwise subdued growth environment.

Volumes in international markets were up 8 per cent, compared to the four-year growth of 15 per cent.

In addition to volume growth, what aided revenue was realisation growth of 10.4 per cent.

Realisation per case came in at Rs 174, led by a price hike in some stock-keeping units (SKUs) at the end of the year-ago quarter and mixed improvement in smaller SKUs, such as Sting.

The operating performance of the company was strong in the quarter.

Lower raw material prices and better product mix rubbed off positively on gross margins which rose 90 basis points (bps) YoY to 52.4 per cent.

Strong revenue growth translated into higher operating leverage, helping the company expand its operating profit margins by 170 bps to 20.5 per cent.

The company is expanding its presence in the value-added dairy beverage, sports drink, and juice segments to sustain growth momentum.

Say research analysts Devanshu Bansal and Bhavika Choudhary of Emkay Research, “Sting is a huge success, with about 500 bps of incremental contribution to calendar years 2019 through 2022 compound growth rate of 23 per cent, in our view.

"Similar traction in new products can surprise positively.”

It is adding two plants to overcome capacity constraints and meet demand in these categories.

The company is also planning to expand distribution of the sports drink Gatorade and has launched a lower-priced bottle of Rs 200 for 200ml.

The brownfield and greenfield expansions across the country, together with higher working capital, led to an increase in net debt by Rs 600 crore on a sequential basis to Rs 4,000 crore.

This, according to Jefferies Research, should come off after June as peak season ends.

Most brokerages have increased their earnings estimates for calendar year 2024 (CY24) by upwards of 6 per cent.

Elara Capital has raised its earnings estimates for CY24 by 6.8 per cent to factor in higher revenue growth and better margin.

The management guided for return on capital employed improvement by 100-150 bps a year for the next two years, say analysts of Elara Capital, led by Amit Purohit.

Given that target prices of multiple brokerages are between Rs 1,630 and Rs 1,670 per share, the upsides from current levels (Rs 1,557) are minimal. Investors will have to await better entry points into the stock which is trading at just under 45x its earnings estimates for CY24.