Emkay Global Financial has given Buy recommendation for Varun Beverages with a target price of Rs. 1220 in its research report issued on Oct 25, 2022

Emkay Global Financial’s research report on Varun Beverages

VBL posted ~19% revenue CAGR in CY12-21, led by revenue CAGR of 18% in India and 23% in international geographies. The robust global growth was driven by strong ramp up in three-country Africa operations and a sustained growth in Nepal. In our view, Africa is a large soft-drinks market (Emkay Est: >USD25bn industry size as of CY19) and its attractive macro growth + demographics offer a low-teen revenue CAGR opportunity over the medium-to-long term. We estimate that PepsiCo currently addresses 40-45% of the Africa market (value terms) via presence in 13 countries vs. ~100% for The Coca-Cola Company (TCCC) via presence in >50 countries. Hence, potential distribution expansion by PepsiCo should help it to grow faster than the industry. Moreover, VBL’s proven execution capability in Zimbabwe/Nepal (~50% of market share now vs. marginal share at the time of acquisition of distribution rights) and PepsiCo’s focus on growing franchise-owned bottling operations should help VBL to foray into more markets in Africa; its procuring distribution rights in the Democratic Republic of Congo (DRC) recently is a testament to this. Factoring-in conservatively the potential Africa opportunity, we increase our CY25-35E growth by 300bps to 18%, effecting a higher multiple, at 40x Sep-24 EPS (vs. 34x earlier). RoIC for international geographies has also improved, to ~20% in CY21, led by margin gains and better sweating of assets.

Outlook

We maintain BUY with revised TP of Rs1,220 (vs. Rs1,060 earlier).

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